In the latest Bayfield Training Webinar, Sonia Martin-Gutierrez and Andri Rabetanety present: An Introduction to Student Accommodation Investment. With the rise of international students and the overall growth of enrollment for higher and further education, student accommodation has attracted real estate investors’ interest. This webinar provided a broad overview of student housing investment, including its risk/return profile, macroeconomic-drivers, business model, and how it differs from traditional real estate.
Purpose-Built Student Accommodation (PBSA)
Student accommodation has developed into a global asset class as appetite is getting stronger for that type of asset. Global investments into PBSA reached a record $16 billion in 2018. The key reason behind this capital investment growth is a combination of demographics, student mobility, and the growing demand for a better living student experience.
PBSA is housing, specifically built for university students by private developers. Properties can take several forms, including self-contained studios or “cluster” flats with private kitchens but a shared living space. Moreover, some may be modern residence halls containing en-suite bedrooms with a shared kitchen, dining, and living facilities. International students are the leading market for PBSA as they require convenience as they enter a brand new city. International students now make up around 14% of acceptances, according to UCAS. While one may say that student accommodation is close to residential, legally, it is not considered a dwelling; thus, the stamp duty regime classifies it as commercial. Moreover, while many residential buy-to-let properties are managed by letting agents, PBSA is managed by a third party, which generally has a specific branding, user experience, layout, and design.
Key Drivers
Next, Andri explains the key elements to pay attention to during the due diligence of PBS investments. From a demand standpoint, the first key element is the average notional students to bed ratio. Today in the UK, this stands at 2.3 students per bed space available, highlighting a higher demand that is not met by the current supply. As Andri explains, one of the central drivers behind the PBSA sector’s growth is the increase of students attending university in the UK. For example, full-time first-year university student enrollment grew by 2.6% between 2016/17 and 2017/18 to 1.85 million. This growth is undoubtedly aided by the UK’s global reputation for top-quality universities, which helps attract international students. In the 2019 QS World University rankings, 18 UK universities were ranked within the top 100.
Business Model based on rooms
Andri continued the discussion by comparing and contrasting the PBSA business model with that of traditional real estate. The PBSA sector is, contrary to traditional real estate, is not necessarily affected by economic cycles in the way that other traditional real estate assets can be. This is because it relies primarily on demand from students. For example, during the global financial crisis, rental growth for PBSA continued at 3%-4% per year, while rental values fell sharply in the traditional commercial property market between 2007 and 2010. Furthermore, the income offered by PBSA is also particularly stable. Students typically sign a 48-week contract, with the additional security of guarantors, which provides certainty for rental income and protects against the risk of void periods. Moreover, it is also common to let out on a short-term basis during the summer holidays. Thus, similar to the hospitality industry, the quality of the service, the number of beds, the operator’s quality, and the branding of the operator will affect the value and the ability to generate an income.
An Active Capital Market
Finally, Andri focused on the capital market of PBSA. Andri explained that the PBSA sector had shown resilience, demonstrated by the number and the scale of recent transactions. Although COVID-19 has impacted higher education, the student accommodation market is holding up much better than expected.
In the long-term, the virus does not seem to have altered the continued expansion of PBSA investments. UK student accommodation has enjoyed tremendous growth over recent years, with international investment almost doubling over the last two years and institutional investors acquiring big interests attracted by compelling yields and strong capital growth. Research by Cushman & Wakefield reveals that the UK is home to four of the top ten cities in Europe for student accommodation investment. London was the top investment destination in the world in 2018, receiving £1.9bn of investment. A recent notable investment is Blackstone’s acquisition of IQ student accommodation for a record deal of £4.66bn in May 2020. In sum, PBSA is a high yielding proposition, which is particularly attractive in the current environment of low-interest rates.