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Is student property a bubble?

Is student property a bubble?

Purpose Built Student Accommodation (PBSA) is continuing to soar in popularity and perform well above the average compared to other asset classes, with investors piling in like never before.

While student property appears to be an excellent alternative investment opportunity, there has always been an element of suspicion from older and more established property investors. Unlike, for example, residential or commercial property, student property remains young and fresh.

True enough, there certainly appears to be a novelty to the sector from some. Having only really risen to any sort of prominence, certainly in terms of press coverage, within the past decade the PBSA sector is still infantile in comparison to other property types.

Off-plan property, also booming in urban centres, shares a number of characteristics and is probably the closest type to draw useful comparisons. Both have strong yields and capital appreciation and occupy a space where supply is far outstripped by demand.

At almost all estimates, there simply isn’t enough student accommodation to provide all students, and predicted increase in student numbers, with the beds required. Savvy foreign investors are starting to recognise this too, with foreign funds and developers investing big in projects across the country, whilst smaller individual investors also buy up student ‘pods’ with increased enthusiasm.

The fairly rapid rise of student accommodation as a viable investment option has led many to wonder whether its rise is sustainable or whether, in fact, PBSA could be a bubble set to burst.

In a piece for The Telegraph, Rhiannon Bury asks that very question. In the introduction to her article she points to luxury flats, advertised at an eye watering £568 per week, in London which have remained available and have not, as yet, been rented.

Further to this she wonders whether the booming job market will have an adverse effect on mature student numbers, with many choosing to stay in work rather than returning to study. She also questions whether concerns about leaving the EU could also hamper student numbers, which saw a slight drop for UK full time students this year.

Bury interviews Jo Winchester, a senior director at property advisory firm CBRE, to ask whether she can foresee issues that could bring about a price drop. Winchester raises a pertinent point in suggesting that students are now savvier with their money than ever before and increasingly look for better value in their accommodation.

Developers who wish to make the most out of their developments, and the investors who buy them, should look for projects that offer amenities and features that will stand the test of time, rather than gimmicks that can only attract tenants in the short term.

Could Bury be right? Is PBSA a bubble waiting to burst? Well first and foremost she props the most important part of her argument up on PBSA rooms in luxury areas of London. It’s at best unreliable and at worst completely pointless to look at the luxury student accommodation market in the city ranked 5th in the world for most expensive student cities.

The figures don’t really suggest that we’re sitting on a bubble either, with investors rushing to back the burgeoning sector, with an estimated £5.3bn expected to pour in this year, 17% more than was invested in 2016, according to property advisory firm Savills. According to their research 68,000 pods were exchanged in 2016, which is expected to rise to 75,000 by the end of this year.

The majority of researchers are also finding that student demand for pods far outstrips the current supply, up to 3-1 by some estimates.

All in all there is probably a kernel of truth in the idea that some projects and developers have taken part in “fad” developments which haven’t been placed in the best areas or with short term designs.

With any young asset class, or any young investment vehicle in general, the tendency is always to invite suspicion and caution, which is a natural and sensible reaction.

Despite this the figures and the research doesn’t suggest that PBSA is either overpriced or oversupplied, the two key factors in any crash. Prices continue to rise because supply doesn’t meet demand, and the fact that investment capital is rising year-on-year by almost 20% suggests that investors recognise this and find value in the price.

The answer to whether this is a property bubble? The evidence suggests not.