In a report by EY.com, it was mentioned that in 2015, the sector experienced unprecedented investment volumes, with c. 75,000 PBSA beds transacting at a total value of c. £5.9bn, double the volume seen in 2014.
It’s a figure that may surprise many, but won’t shock those who are now old hands in the Purpose Built Student Accommodation (PBSA) asset class. A class which until recently has been considered an alternative investment class has now transformed, fairly rapidly, into an institutional favourite. Far from being the unstable, risky investment that requires undue amounts of inside knowledge and experience, the PBSA sector has outperformed many other asset classes to lead many to think it will be the class of the future.
With this in mind, the fact that you’re reading this article insinuates that you’re either A) A current PBSA investor, or B) you’re interested in investing into PBSA. Let’s take a look empirically at the evidence to judge where the sector has come from, where it stands, and where it’s likely to go in the coming years.
In a report from 2014, Knight Frank said, of PBSA, that occupational demand is now on a firm upward trajectory and all core UK markets are structurally undersupplied with student accommodation. The new equity is excited by the opportunity sophisticated branding and targeted marketing could bring to the sector.
They forecast that PBSA will see increased rental growth, sharpening yields and improved investment performance for existing funds. The sector has undergone a funding revolution but in many respects the best is yet to come.
Further to this, the demand and supply imbalance across the UK is vastly weighted towards demand from students vs chronic undersupply of private student housing. In a graph indicating the areas worst affected they detailed Manchester, Leeds, Liverpool, Birmingham and London as those worst affected.
The drive to increase participation in HE resulted in a record 37% of UK 18 and 19 year olds applying for a full time undergraduate place in the 2015 admissions cycle, the highest proportion ever recorded. This proportion has grown rapidly over the last ten years, up from 27% in 2006.
So considering what we now know is an ever-increasing demand for university places, working in parallel with a chronically undersupplied market we can only arrive at the conclusion that not only will demand hold up, it will increase and subsequently drive prices and yields up over the coming years.
Having said this, we have to be realistic about the fact that PBSA cannot and will not rise exponentially forever and it would be sensible to look at the scope for expansion over the coming years. Essentially speaking, and with Brexit approaching, there is simply a cap of the amount of 18-21 year olds and school leavers that will apply to attend university. With the applications reaching record levels, it’s unlikely that they will increase much over 37% and are actually likely to plateau around the 40% mark, if they do indeed reach that level.
According to the EY.com study, the number of PBSA beds in the UK as a whole remains significantly below the number of full-time students in the UK. However, the demand for PBSA does not stretch to the entire population of full time students. In non- collegiate and non-campus based universities, students often prefer to move into HMOs during their second and third years of study, and thus PBSA typically caters for first year undergraduate and post graduate students, with a large number of these being international students.
In Knight Frank’s 2016 report into PBSA performance, we can perhaps see in more solid detail just why institutional investors and smaller investors alike have now begun to flock into the sector. In comparison to retail property (9.5%), office property (20.5%), and industrial property (19.7%), student PBSA asset classes returned a massive 21.5% on their investor’s original amount. Looking again at the same comparisons PBSA saw capital returns of 15.3% compared to 3.3% for retail, 14.9% for office, and 12.7% for industrial. If we then look at income returns, or yields, PBSA averaged 6.1% compared to 6% for retail, 4.9% for office and 6.3% for industrial.
Clearly, considering the facts, the performance and the forecasts for PBSA, we can now build a solid and illuminating picture as to why PBSA has transformed from an alternative asset class five years ago, where many approached with caution, to an institutional class now with the levels of investment hitting record levels (the majority coming from large-scale developers), and looking to become one of the heavy hitters in the future.