An article by Louise Peters, Senior Manager, Puma Property Finance

Purpose Built Student Accommodation, or PBSA as we all now refer to it, is a subject that’s hard to avoid when you read any real estate focused media. But this hasn’t always been the case.

I still remember 10 years ago when I was working as an accountant supporting the real estate finance team, the opportunities to fund these large developments of 100+ beds started to present themselves and we spent many hours analysing large cashflows, detailed operational models, and researched demand. We were nervous back then, and quite rightly so, of such large numbers. But the market very quickly established itself on an institutional level and the focus promptly moved away from a question of demand and onto the how, who and where. As a lender, as long as those elements stacked up, competition was now tough to win the deal and still is, despite a difficult macroeconomic climate post-covid combined with other significant global events.

I attended the LD Events Operational Resi conference recently and heard some really positive statistics on the market. Did you know that PBSA is the most globally traded Real Estate asset currently, and that 46%[1] of this activity is in the UK? I certainly didn’t. It was encouraging to hear.

But it’s still not without its challenges. Put simply, viability has been hit from all sides in the last few years. Construction costs are, or have been, going up. Cost of finance has gone up, and yields have moved out meaning the end value is also taking a beating. While rents have been growing, by as much as 10% per annum in some cities[2], we are already starting to see the impact this has on occupancy with many schemes taking longer to fill and some not even reaching full capacity.

The result? Many funds are nervous about banking on the rental growth and yield compression that you would normally see in a business case, and therefore many schemes are simply unviable. This has led to funds sitting on large pools of committed equity, raised in a high-interest rate environment, unable to deploy. The knock on of that is that fundraising is at a 10-12 year low as funds struggle to reach their caps and investors find alternative less risky options.

So, does all this mean the PBSA bubble we’ve all been enjoying has finally popped? Are we all now going to turn to the next hot sector such as industrial or multifamily housing? My personal opinion is no. And this really comes down to the numbers.

It is undeniable that the appeal of higher education is growing across the globe. There were 2.9 million[3] students in the UK in the 22/23 academic year, up 20% in only 4 years. That’s 480,000 additional students that need to find accommodation. Put that into the context of only 258,000 new beds built in a 10-year period since 2012, and a significant reduction in the construction pipeline as a result of recent challenges discussed earlier, the numbers just don’t add up.

Purpose built accommodation supports less than 10% of students living in the UK.[4] About 20% live with their parents, and roughly 10% in university provided accommodation, so that still leaves over 1 million students living in Houses in Multiple Occupation and various other forms of rental accommodation which are often of poor quality and decades old. Students – and their parents – are more frequently seeking good quality accommodation well managed by a professional landlord, with the convenience of all-inclusive bills, wellbeing provisions, and social engagement opportunities. So much so that a survey carried out by Knight Frank and UCAS this year reported that 65% of students admitted that the availability of accommodation influenced their decision on where to study. Surely, that should not be the case.

The appeal to foreign students has undoubtedly been affected by the government’s move in January this year on visa applications restricting undergraduate students (70% of total higher education students[5]) from bringing their dependents with them.  However, the reporting on this appears to be somewhat exaggerated. August applications – the busiest month of the year – were down 17% from August 2023 and the year-to-date figures are coincidentally a very similar percentage[6]. That sounds grim, but not quite as bad as the 40% reported in some media[7]. What has been omitted though, is that we are still quite significantly above the pre-pandemic levels which were roughly around 200k applicants per annum[8]. There was a significant increase in applications following Covid as restrictions were lifted and the EU banned free movement. This year, at only 8 months in, we were already 40% above that figure at 278,000 applicants[9]. So maybe what we’re really seeing now is just a “settling period” post Covid and a return to a more sustainable level.

Personally, I think the strengths of the sector outweigh the challenges it has seen in recent years and the simple demographics all but ensure its continued performance. That said, I would strongly recommend you choose your cities wisely and avoid the attraction of excessively inflated rental levels.

At Puma Property Finance, we are a big fan of the sector and have backed some of the top developers in this space across the UK and Northern Ireland with a current loan book secured against PBSA assets in the region of £300m.

Sources

[1] Knight Frank

[2] Knight Frank UK Student Housing Update Q2 2024

[3] www.gov.uk/government/statistics

[4] www.hesa.ac.uk

[5] www.hesa.ac.uk

[6] www.wonkhe.com

[7] www.wonkhe.com

[8] www.gov.uk/government/statistics

[9] www.gov.uk/government/statistics and www.wonkhe.com