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How Purpose Built Student Accommodation became the UK’s number one property sector

Student accommodation best property sector
Apr 30, 2015

This article analyses how Purpose Built Student Accommodation has grown from a niche market into the top performing property sector in the last 20 years – one of the reasons it has become such a popular student property investment.

 

Highlights

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Introduction

World Class Asset

Government restrictions on the number of students UK universities can take on will soon be abandoned altogether. Even before this has taken affect, the UK student accommodation sector, and Purpose Built Student Accommodation (PBSA) in particular, has reached the stage of being considered a world-class asset.

Privately financed and built PBSA developments first started appearing just over 20 years ago. It was then considered to be a niche market. But throughout the intervening years, its fast growth in popularity has turned student accommodation into the No.1 property sector in the UK.

This growth was initially fuelled by a scarcity of supply. In the 1990s, aside from university owned halls of residences, converted residential properties were the only form of student accommodation available in any real number. The quality of this accommodation type is generally low, with oversubscribed and poorly converted facilities.

PBSA was a welcome new addition to the student accommodation scene, and one that rapidly grew in popularity despite higher rental demands.

More and more money is now being poured into the PBSA sector here in the UK, but it is still woefully undersupplied. The success of the sector is however built on more than supply issues alone.

 

Sustained growth in student numbers

Ever growing student numbers

The rise in prominence of PBSA has been underpinned by growing student numbers across the globe. The global student population has grown from 98 million in 2000 to 165 million in 2010, and this figure is predicted to rise to 263 million by 2025. Global international student mobility is also at record levels.

The two countries with the best university systems in the world are the UK and the US, and between them they take the largest proportion of international students. It therefore comes as no surprise that the student accommodation sectors in both countries have expanded substantially, with both the UK and the US showing yields of between 10% and 15% per annum.

Whereas up until now the UK government has exercised a close control on the number of students that universities were able to enroll, that limit has already been substantially reduced, and between 2015/2016 will disappear altogether.

So, as well as there being a substantial and potentially widening undersupply in terms of PBSA property, there is also an escalating demand in terms of student numbers stretching to the year 2025 and beyond.

 

The global appetite for UK student property

UK's leading Purpose Built Student Accommodations sector

Student accommodation is a fast-growing sector in the worldwide economy. However, it is estimated that most other markets in mainland Europe are about 10 to 15 years behind the UK and the US in terms of development.

The university cultures in Asia and India are going through a significant transformation and there are a number of large construction programs redeveloping campus infrastructure. Investment opportunities will undoubtedly grow in these countries, but this will not affect the number of mobile international students. This is because the big attraction of the UK and the US, as well as Australia for the Asian market, is studying in an English language environment. The English language is becoming increasingly important in terms of employabiity and the future transacting of business on the global stage.

Economic development brings with it a growth in the size of a country’s middle class. This is happening in many emerging European and Asian countries; these families have more wealth, which they are determined to invest in their children’s education. Approximately 50% of students living in quality PBSA are from outside the UK.

A significant proportion of investors into UK PBSA also come from abroad. Beyond the quality of Britain’s universities, this is because of the country’s strong economy, stable political system and transparent property law.

The growing reputation of the student property investment sector has resulted in more large-scale foreign corporate investment. In the first half of March, approximately £2.4 billion (more than was invested in the whole of 2014) from Canadian, Russian and the US poured into the sector. This wasn’t for new builds, but rather existing properties changing ownership – an indication of the recognition of the earning potential and growing demand for student accommodation.

 

The counter cyclical nature of the market

Recession-proof demand

Another factor in the success of this sector is the non-cyclical nature of investments. The world economy is subject to a number of forces that lead to fluctuating demand. This usually culminates in cycles of growth, stability and recession. The student accommodation sector, however, has so far proven itself to be impervious to these cycles. During the last big recession, PBSA was one of the few investments that continued to perform normally, still offering good returns.This is because, during periods of economic downturn, people chose to go to university rather than risk unemployment, ensuring high demand for PBSA.

Its non-cyclical nature means that the student property sector has remained attractive to investors who receive fixed yields of up to 10% over a period of up to 10 years.

 

Importance of high build quality and effective management

Professional onsite management: effortless income

The other thing that plays an important part in the demand for PBSA is the quality of the accommodation itself. Many halls of residence are now quite outdated and do not offer good facilities like hi-speed internet and gymnasiums. Residential conversions are often overcrowded, poorly converted and even unsafe in terms of gas and electric appliances. Quality PBSA, on the other hand, offers luxury accommodation, with modern fixtures and fittings.

With demand for PBSA so high, full occupancy is virtually guaranteed, even when actual yield guarantees aren’t available.

Last but not least, is the fact that PBSA investments are hassle-free, thanks to the services of professional student property management companies.

 

Future health of student property sector

Reliable high NET yields

With PBSA now clearly established as the No.1 property investment here in the UK, the forecasts are that this is likely to remain the case for many years to come. This is based on:

  • Critical national undersupply of accommodation
  • Sustained growth in global student numbers
  • Removal of national student intake restrictions
  • International appeal of UK property
  • Long fixed income periods
  • High demand from undersupplied student population
  • The hassle-free nature of yields

 

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