Purpose-built student accommodation (PBSA) differs from the student accommodation many of us remember. Today’s students are shunning the traditional house shares and out-of-date halls of residence as they’re perceived to be below par, with PBSA gaining in popularity from a more discerning student population. Purpose-built student accommodation is perfectly designed to meet the exacting standards of today’s students, ranging from studios to flats with a cluster of six or seven rooms sharing living quarters. Shared social spaces provide cable TV, laundry facilities and even organised social events, with many also offering gym facilities. Positioned in central locations and with all-inclusive rents PBSA has proven very popular with students, particularly international students, across the UK.
According to Cushman and Wakefield, demand for PBSA is high, with the average national student to bed ratio at 2.3 students per bed space available through PBSA, up from 2.14. However, supply is restricted, which adds up to a powerful investment case.
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. So why the growing interest in student accommodation as an asset class? And what types of returns can investors expect from student accommodation?
High income and attractive total returns: a compelling combination
Purpose-built student accommodation is a higher-yielding proposition, which is particularly attractive in the current environment of low interest rates. As the income for PBSA grows (which it has been steadily), so does the value of the building.
PBSA saw rental income growth of 2.7% in 2016 on average across all available accommodation. In the academic year ending August 2016 PBSA delivered a 10.2% total return, with a combination of 5.4% rental income and 4.8% capital growth according to CBRE. We are targeting a dividend yield of 6%+, after all costs and fees.
The 5-year annualised total return for PBSA for 2012-2016 was 11.8%, compared for 7.4% for commercial property and 7.8% for residential property (according to the CBRE student accommodation index, IPD quarterly property index, UK HPI and ONS rental growth index).
Historically on a risk reward evaluation PBSA delivers higher average total returns than residential property in the UK with a similar level of volatility, and outperforms commercial property, making it a very attractive asset class.
Stable demand and low volatility
Purpose-built student accommodation benefits from stable and growing demand for student bedrooms across the UK. The UK student accommodation market is supply-constrained with James Pullan, Head of Knight Frank Student Accommodation, commenting that “the market is still structurally undersupplied in all core university cities”. In 2016 there were more students in the UK than ever before with 1.7m now studying full-time, up 0.4% from the previous year.
PBSA appears not to be affected by economic cycles in the way that other assets can be, because it relies primarily on demand from students. During the global financial crisis, for example, data from LaSalle Investment Management shows that rental growth for PBSA continued at 3-4% per year, while rental values fell sharply in the wider commercial property market between 2007 and 2010. This could also be driven by the fact that many people choose to continue (or return to) study during a recession.
The income offered by PBSA is also particularly stable. Students typically sign a 44-51 week contract, with the additional security of guarantors, which provides certainty for rental income and also protects against the risk of void periods.
Why it’s better than buying a single room
An investor with enough capital to buy a room in a PBSA block themselves may find themselves wondering why they would invest through an online platform like Property Partner instead. Aside from the increased ease and security, our expertise and buying power, along with diversification opportunities and increased liquidity we offer, we also believe there are major problems with buying a single room.
The main issue with buying a single room in a student accommodation block is around control over the asset and potential exit. While buying a single room in a student block may appear to be similar to buying a flat in a larger block, it isn’t.
The UK residential property market is in the majority driven by owner-occupiers who acquire individual flats and homes. By contrast, the market for individual student rooms is much smaller, with the majority of buyers being institutional investors looking to buy entire student blocks. This makes buying an individual student room risky as when the owner comes to sell it is unclear who potential buyers could be, how exactly they might sell, how long it could take, and what fees would be involved.
Buying an individual flat in a student block also puts total reliance on third party management over which the individual buyer has no or very little control. Sometimes a rent guarantee can help to alleviate this reliance, but this is likely only for a short period of time, and doesn’t cover the entire time horizon of what should be considered a long term investment.
Previously it has been very difficult for individual investors to invest in entire blocks. Now new online platforms are making this preserve of institutional investors available to all.
Sources
1. JLL UK Student Housing Bulletin Q2 2017 http://www.jll.co.uk/united-kingdom/en-gb/Documents/property-sectors/alternative-investments/UK-Student-Housing-Bulletin-Q2-2017.pdf
2. Savills Spotlight: World Student Housing Report 2014
3. Knight Frank Student Market Review 2016
4. Cushman & Wakefield UK Student Accommodation Report 2016/17
5. Savills Spotlight: UK Student Housing 2017
6. CBRE student accommodation total return index, 2016
7. LaSalle Investment Management, Student Accommodation in the UK, September 2014
