PBSA remains the most resilient asset class for investors

The purpose-built student accommodation (PBSA) sector remains the most resilient asset class for investors, says a partner at specialist value-add investor and asset manager Tri7.

Sam Castle, Partner at specialist value-add investor and asset manager | PBSA News
Sam Castle, Partner at specialist value-add investor and asset manager Tri7. Image credit: Amber Pollack Photography.

Amid the economic downturn, there has seemed to be very few winners. Or, at least, that might seem to be the case in the short-term. The property sector has faced rising interest rates, higher construction costs and widening yields. Rental growth has helped but cannot account for all the movements in the opposite direction.

By Samuel Castle, Partner, Tri7

It would however be the wrong conclusion for investors – particularly long-term orientated private equity firms, family offices or institutional investors – to write off real estate and seek to deploy their capital elsewhere. That’s because the living sector especially, although no doubt hit by the downturn, comfortably remains a very strong long-term play with very real short-term benefits too.

In particular, what we have observed is that sustained interest for prime sites remains strongest, providing robust downside protection, although it is becoming harder to make secondary living developments stack, particularly in the regions for certain asset classes such as residential for-sale.

Within the living sector, operational residential remains compelling – and PBSA is leading the pack. With yields strong, lower construction costs and attractive (inflation-hedged) rental levels, the sector continues to look attractive.

Throughout 2023, we saw investors plough capital into UK student housing. And, looking at positive trends in the market that point towards the medium to long term, this comes as no surprise.

Recent research indicates a significant upswing in the demand for student housing, pointing towards a burgeoning trend that is set to soar. As educational institutions continue to attract a growing number of students, with UCAS acceptances 24% higher than pre-pandemic and ONS research highlighting domestic student numbers forecast to increase by 5% in 2024, this surge underscores the necessity for expanded and improved accommodation options to meet the evolving needs of the student population.

What we’re seeing, alongside our joint venture partners at Fusion Group, is an interesting trend that sees more appetite from domestic students for a better student experience in their living arrangements, too. Increasingly, despite pressures from the increased cost of living that has come with high levels of inflation over the past year, we’re seeing UK students opt for a range of PBSA options as they grow tired of the poor experience and quality that too often comes from the private rented sector. What this means is, not only that demand will continue to increase, it will do so in a more diversified way that will protect the sector should there be – for whatever reason – a decrease in international students from any particular geography.

During the past year, PBSA delivery was less than a third of pre-pandemic levels of 2019. Applying the brakes on construction were factors such as the complexity of the planning process, escalating construction costs from materials and labour, and further financial costs arising from the macroeconomic environment.

Meanwhile, a significant proportion of first-generation stock is becoming redundant and unfit for purpose. This helps drive increasing demand for new or higher quality first- and second-generation PBSA developments.

This imbalance between demand and supply has unveiled an opportunity for investors. The reduction of suitable housing options offers an advantageous position to capitalise on the evolving market dynamics as rental prices increase, yielding better outcomes. In fact, Cushman & Wakefield recently revealed that rental growth for 23/24 academic year was 8.02%, demonstrating the strength of the PBSA sector.

As we continue to see green shoots in both the economy and the world around us as we approach spring, a positive outlook emerges – one that is guided by the expectation of economists who anticipate a favourable trajectory for interest rates, supported by the Bank of England’s strategic move to reduce the base rate in the latter half of 2023.

Forecasts hint at a continued trend, with further anticipated cuts in 2025. Moreover, the economic landscape is further brightened by the decline in building cost inflation, a significant factor that will alleviate financial pressures within PBSA. This and reduced borrowing costs will help stimulate investment and development in the sector.

Research by Knight Frank also predicts a surge in the value of the UK PBSA sector, projecting growth from £85.8bn in 2023 to £104bn by 2028. This underscores a substantial expansion in the financial valuation of the sector, indicative of its resilience and potential for robust development over the coming years.

Fundamentally, unless a major shift occurs to disrupt the UK higher education sector, PBSA assets will continue to be a reliable and deeply attractive proposition in 2024.

That means those who invest in it now will be the winners overall (and the students who make their homes in these schemes will be greater winners even yet).