Recent weeks have seen purpose built student accommodation (PBSA) hit the news for very different reasons. Last week saw Blackstone complete the £4.66bn purchase of iQ Student Accommodation from Goldman Sachs and Wellcome Trust (the largest ever private real estate transaction in UK history). But with the ongoing impact of Coronavirus, Cushman and Wakefield reported landlords wavered up to £773m in rent. With this in mind, it seemed like a good time to look at PBSA and whether it is a good investment in 2020.
What is PBSA?
PBSA is the private development of accommodation specifically for students. It generally takes the form of studio apartments or cluster apartments (multiple rooms with shared living spaces and kitchens). The developments often come with access to modern leisure facilities such as gyms, games rooms and modern living spaces. They are quite an advancement on the traditional student halls that many will associate with. You can find more details here, in 'PBSA Finance Explained'.
What has made it a popular investment choice to date?
In the last 10 years the PBSA market has gone from strength to strength. Reasons for this include:
The international reputation of the UK higher education (HE) sector meaning that the market has been less affected by macro economic conditions.
The continued growth in the numbers of students enrolling for HE means that this is potentially a more stable revenue stream than other forms of development.
PBSA tends to offer lower yields than other development opportunities such as traditional HMO’s as a result of the stabilised income, due to the reduced risk profile.
Better cost efficiency can be achieved on the basis of economies of scale. For example, lower maintenance costs are typically associated with student accommodation, when considered on a pro-rata basis.
A hands-off landlord experience can be achieved by handing it over to a management company once developed.
Coming into the 2019/20 academic year this looked set to continue with UCAS reporting:
Total applicants for 2019/20 increased YOY by 1.6% (to 706,435)
Total acceptances for 2019/20 increased YOY by 1.5% (to 541,240)
Total applications for 2020/21 were up 1.2% YOY compared to the same stage in the cycle as the previous year.
Non EU applications for 2020/21 were up 15% YOY compared to the same stage in the cycle as the previous year.
In addition to the continued strength of the HE sector, demand for new accommodation remained high with Cushman and Wakefield reporting that, in 2019, the rise in demand for beds was 30% higher than the number of beds being developed. 87% of all new beds were being delivered by the private sector (totalling 32,000) and rental growth for 2019/20 was 2.6% YOY. The PBSA sector was all set to continue to fly, and then Coronavirus hit.
The impact of coronavirus
As the UK went into lockdown at the end of March, universities were forced to close and students went home. With the huge financial impact on universities looming, a £2bn bailout package was requested in April by universities. This month, the government announced a package that brought forward tuition fee and research payments.
Despite the Government outlining the plan to ease lockdown restrictions, uncertainty remains over the impact on the 2020/21 academic year. A cap on places has been reintroduced for the year in an attempt to stabilise the sector, although there is debate from the likes of Russell Group members as to the effectiveness of this measure. Where the impact is likely to be felt hardest is on the potential lost revenue from international students, that represent 23% of total students.
The knock on effect to PBSA providers has also been notable. Unions have lobbied hard that rents should be refunded, and a number of providers have met the call. Cushman and Wakefield report that £773m in rental income has been wavered by landlords, £385m of that coming from the private sector.
Future rental incomes have also become a concern for PBSA providers. Those providers with nomination agreements (contracts between universities and providers that a certain number of beds will be occupied each year by the university), are potentially vulnerable to the demands of lower bed rates from universities, as they look to mitigate the financial impact. The potential impact of a reduction in the number of international students will also impact on PBSA providers, due to the reliance on this market to fill occupancy rates.
Whilst all of this sounds alarming, investors will need to weigh up the immediate impact of Coronavirus versus the long term trajectory of the PBSA market.
Are there other risks for investors to consider?
Aside from the impact of the coronavirus, there are two main current pressing concerns that face investors:
The New London Plan
Under proposals made by the Mayor of London's New London Plan, new restrictions would be placed on planning for new PBSA schemes in Greater London. One of the conditions of the plan, is the need for schemes to be tied to nomination agreements, removing the possibility of the higher yields of direct lets. Whilst planning is currently still being granted for schemes, the proposed publication date of the plan is this summer.
The post Brexit world
Despite the understandable focus on coronavirus, Brexit remains a central concern to investors for the long term prospects of PBSA. There remains uncertainty as to how a new arrangement will affect future EU student numbers. At present students from the EU pay the same fees as UK students, and have access to the Student Loan Company. Higher fees and a reliance on their domestic government to support with upfront fees, could turn future applicants to opportunities else where.
For context, government data shows EU students, made up 8% (143,000) of the total number of students in 2018/19, and significantly less than non EU student numbers (343,000). Whilst uncertainty can also be attributed the future numbers of Non EU students, as the UK enters into new trade deal negotiations with nations, the power of the UK HE sector will no doubt be a valuable bargaining tool. There is the very real possibility that the reduction in EU students numbers will be countered by the increases in non EU applications.
So where does this leave us?
Investors will no doubt be mindful of the current conditions, particularly the coronavirus impact. However, at the heart of the success story behind PBSA is a UK HE sector that is world renowned, and where students want to come to study.
Whilst accessibility for international students may change in the future, there remains good evidence that demand for accommodation still outstrips the current rate at which accommodation is being built. Factor in the churn of universities closing down old dilapidated accommodation and demand is likely to remain high for the foreseeable future. Therefore, the question of whether PBSA is a good investment in 2020, becomes essentially a question of whether an individual scheme is a good investment. Investors will need to decide whether the following will generate a successful investment:
Location
Investors need to consider this on both a macro and micro level, in order to ensure maximum tenancy occupation. This means that not only the choice of town/city is of paramount importance (read more about Russell Group locations here), but within this the proximity of the site to the university, transport links, local amenities and nightlife. After all students want to be close to the action!
Cost efficiency of the scheme
As pressures intensify on profit margins, keeping costs to a minimum is of paramount importance. An example of this is the rising popularity of modular builds as a cost effective route to reducing construction costs. Being able to build large parts of the build offsite is an attractive option, especially in the likelihood of social distancing measures being in place for some time.
Tenancy agreement periods
Students tenancy agreements generally vary between 43 and 51 weeks. Obviously this can have a big impact on revenue as, you could be without vital revenue outside of term time. Committing students to 51 weeks rental is of course ideal, but should that not be achievable other revenue streams will need to be looked at.
Operating costs
Assuming that the developer will not be managing the site themselves, an operator will need to be employed to manage the site. As the face of the investment, they will be responsible for delivering the day to day objectives of the project. A poorly managed site will see a drop in occupancy.
How We Can Help
Purpose built student accommodation is a very specialist form of development finance that needs target knowledge. Montpelier Private Finance has vast experience in securing funding. By using our enviable insight into such projects we understand how best to position each proposition with lenders. We are able to support new entrants to the market as well as give the competitive edge to existing operators.
If you have a specific case you wish to discuss you can get in touch here.
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