Published: Dec 17, 2020
Ramsay Duff, Investment Director at Maven, assesses how the purpose built student accommodation (PBSA) asset class has performed during the COVID-19 pandemic and whether the long-term sector drivers remain strong.
Anyone familiar with the landscape of large university cities cannot have failed to notice the growth in the number of PBSA developments. Maven Property has been playing its part, having worked on 14 PBSA projects across the UK in locations ranging from Dundee to Exeter delivering over 2,200 beds.
But what are the prospects for investment in the PBSA sector in the light of the COVID-19 pandemic?
The impact of COVID-19 on the higher education sector has been widely reported: a shift from face-to-face to online teaching; students returning home to study and/or delaying their return to university; universities and private providers under pressure to refund tuition fees and/or rents; high incidences of COVID amongst students.
While COVID has impacted all sectors of the economy to varying degrees, based on what we are seeing within our operating assets we expect the effects will be short-term, with a cash-flow hit in the current semester but occupancy trending to normal levels by the start of the second semester and a full recovery by the next academic year.
Looking beyond COVID, the fundamental attractions of the UK PBSA sector remain strong.
In 2018/19, the total number of students studying in the UK was 2.4 million, an increase of 5% over the previous five years. Of these, around 80% were UK nationals. The number of 18-year olds in the UK reached a recent nadir of 700,000 in 2020 but is forecast to increase to 880,000 over the next five years, an average increase of 176,000 pa. At current university application rates, that would result in an additional 69,000 UK students, of whom around 40,000 might be expected to study away from home.
Around 20% of students studying in the UK were from overseas, the highest proportion in the world outside the USA, this number having grown by more than 50% over the last 10 years. China remains the largest overseas domicile of UK students with numbers having doubled over the last decade and projected to double again over the next decade.
There are approximately 660,000 PBSA beds in the UK, of which more than half are now privately owned. In 2019/20, a net c.20,000 beds were added but it would be reasonable to expect that the supply of new stock opening in 2020 and 2021 will have been delayed to some degree by the outbreak of COVID.
At current rates of new PBSA development, demand is increasing 30% faster than new beds are being delivered and barring any fundamental shift, the UK market will be structurally undersupplied for years to come.
Investment returns from PBSA reflect the strong market fundamentals, with reported overall returns of 9.4% in 2018/19, exceeding the 2.5% for the commercial property sector as a whole, as has been the case in all but one of the last five years. Annual rental growth in the PBSA sector over the last 10 years has averaged 4.5% compared with 2.8% for RPI, 1.8% for industrial rents and 1.4% for office rents.
All of this is reflected in a continued compression in yields for all but secondary regional markets. For example, since 2017 yields for prime regional assets have improved by an estimated 100 basis points to 5.25%, yet still offer scope for further improvement given they remain at a discount to other property asset classes. Inevitably the number of transactions concluded in recent months has been limited, however those that have completed have not reflected any reduction in valuations.
The accelerated and indeed potentially permanent shifts in behaviour arising out of the COVID pandemic are likely to see investors search for more defensive asset classes with attractive income characteristics. The PBSA sector offers that opportunity and we remain confident of its resilience during these unprecedented times and beyond.
As well as the existing portfolio of assets and development projects Maven see a strong pipeline of attractive new opportunities as UK student numbers continue to grow and the UK suffers from a shortage of purpose built accommodation in key locations.
Maven has identified, assessed, structured, financed, delivered and actively managed multiple PBSA developments across the UK. Our specialist team work closely with property developers to add value and maximise investor returns. To find out more about our property finance please contact email@example.com.
Data provided was taken In October 2020 from the Higher Education Statistics Agency (HESA), Office for National Statistics (ONS) and research principally from Cushman & Wakefield, Knight Frank and CBRE.