By Rachel Aird, Senior Research Analyst, UK
Everyone remembers their university days, don't they? The friends, the social life and the dreaded finals are all par for the course for students. But where you lived during those all-too-brief years is also unforgettable. Whether it was a room in halls or a shared flat with friends, this is the point where many young people take those initial steps away from the parental home and start fending for themselves. Universities have long been the main providers of student accommodation, but over the last decade the private sector has increasingly invested into the sector. As a result, the market for student accommodation is now bigger and broader than ever before.
There are three main types of ownership in this sector: traditional halls and flats that are owned by the university; accommodation that is owned by investors, but where the university takes on a long lease and the letting risk (this tends to provide a secure income, often with inflation-linked reviews); and accommodation that is owned by investors, but where the owner leases the bed space directly to students and takes on the letting risk. The whole sector is now known as purpose-built student accommodation (PBSA) - a once niche market that has matured to become an established investment sector in response to rising student numbers. Can the growth continue, though?
Examining student numbers
Students from the UK make up 78% of full-time places, whereas those from overseas - from the European Union (NYSEARCA:EU) or elsewhere - make up the remainder. Over the last three years, full-time student numbers have increased but only by 1.2% per year; the growth has been dominated by overseas students, whose numbers have increased by more than 2% a year.1
Demographics also suggest weaker future growth in UK student numbers. Mid-year population estimates indicate that there are 12.5% fewer 13-year olds in the UK than 18-year olds - so about 98,000 fewer individuals will be finishing school in five years' time.2 Although not all of these teenagers would end up applying to university - and, indeed, some universities are currently oversubscribed - it does suggest less future demand for universities as a whole. At the same time, rising tuition fees, the growing popularity of online courses, government encouragement of apprenticeships at both technical and degree level, and potentially two-year degree courses may all have an effect on student numbers. The effects are unlikely to be felt across the board, though: weaker universities are likely to suffer most from any reduction in applications, while higher-tariff universities should continue to see stronger growth in student numbers.
Brexit creates another concern for future student demand: EU students pay the same fees as UK students (£9000 in England and a minimal amount in Scotland) rather than overseas student rates. Unsurprisingly, the thought of higher fees and potential changes to immigration rules are already affecting the UK's appeal to EU students. Data from the Universities and Colleges Admission Service (for the 2017 university cohort) shows that applications from the EU are already down 7% in comparison to a year ago. University towns with a high proportion of EU students, such as a number of those in Scotland or close to the south coast of England, will be most at risk from any reduction in student numbers.
That said, growth in the number of students from other parts of the world could bolster demand. China and India have the largest populations - with around 1.4 billion and 1.3 billion inhabitants, respectively3 - as well as the largest numbers of students studying abroad (around 700,000 and 180,000, respectively4). Although changes to immigration rules have meant that the UK has been experiencing a fall in the number of students from India over the three years to 2015, the decline has been offset by a growing number of students from China. In fact, China now accounts for 29% of the UK's non-EU students, ahead of India at 5%; in 2010, the proportions were 23% and 13%, respectively5. As other countries around the globe compete for international students, maintaining market share in these burgeoning geographies will be key to safeguarding future UK student numbers.
Rising supply but depends on city
The growth in supply has been very strong over recent years: bed spaces in university halls - which account for 60% of the total PBSA stock - have increased by 5%, while bed spaces provided by private operators rose by an enormous 43%, according to Cushman &Wakefield. This has led to concerns over increasing supply in some cities.
Overall, the PBSA market houses nearly a third of all full-time students but the provision varies from one city to the next, according to Savills: Liverpool, for example, has purpose-built accommodation for around 50% of its students, while in London the figure is below 30%. The two-thirds of students who don't live in PBSA are split almost equally between those who live in the private rented sector (NYSE:PRS) and those who live at home - i.e. with their parents or in their own home. Some universities attract more local students and staying at home can cut down on costs. Glasgow, for example, has one of the highest numbers of stay-at-home students of any Russell Group university. For others, living in the wider private rented sector may be more attractive, especially for those who prefer to live in shared flats/houses rather than studio-style accommodation.
Traditionally, overseas students and postgraduates also tend to make more use of PBSA. This is because they are less likely to have a family in the UK or their own home to fall back on. And, by its nature, PBSA is both easier to understand and arrange from abroad. By contrast, the private rented sector, which is dominated by buy-to-let landlords, tends to be very local in nature. So any fall in the number of EU students could magnify the risks for investors in the student accommodation sector.
Finding the right cities with the right risks
In this maturing market - with weaker demand and more supply - finding the right asset has become more important than ever. Some cities may see well-above-average demand, for instance where a university is changing the campus location or creating a new campus. Where cities have more than one university, though, stronger growth in student numbers at one university may be diluted by relatively weak growth from others; as such, the location and target market for the accommodation is vital. Other cities with poor-quality existing stock may provide refurbishment opportunities.
The overall proportion of overseas students in a city will also be an important indicator of demand. But given the implications of Brexit, an over-reliance on students from the EU could be a concern - at least in the short term. Meanwhile, cities that derive a relatively high proportion of overseas students from outside the EU could prove to be relatively resilient.
While overall trends can act as a guide, detailed research on individual cities and universities will be key to creating durable rental income streams in this sector. Finding value in a mature market like this will be tricky; as always, it pays to swot up.
- Source: Higher Education Statistics Agency (HESA)
- Office for National Statistics (NASDAQ:ONS)
- UN World Population Estimates
- UNESCO United Nations Educational Scientific and Cultural Organisation
- Higher Education Statistics Agency (HESA)