Is Investing in Student Housing in the UK Worthwhile in 2023?

The student accommodation market has been witnessing considerable growth in the UK, USA, and Australia. With an estimated inflow of over £8.2 billion, the UK has been at the top of the global student housing investment market in the year 2022. With some of the best universities in the world, the UK has maintained its reputation as a highly respected center of learning for many years. The ever-increasing number of higher education enrollments in this region has allowed investments in student housing in the UK to consistently demonstrate exceptional profitability and resilience, even in times of economic turmoil.

In this blog, we will explore the new opportunities in student housing investment and the challenges in this sector. By tapping into high-yield markets, this accommodation market can be a lucrative opportunity for investors.

A Peek Into Student Accommodation Market in the UK

Previously, the majority of student housing investment was in Student Houses of Multiple Occupancy (student HMOs). Investment in purpose-built student accommodation (PBSA) in the UK is set a record of £7.2 billion in 2022, up 69% year-on-year and well above the long-term five-year average of £4.1 billion. Today, however, PBSA has completely transformed this market and has become one of the fastest-growing real estate sectors in the UK. Investments in student housing in the UK have drawn capital from around the world and offer investors solid and consistent rents. That said, in the UK student housing market, there are mainly two types of property that bring more profit. These are as follows:

Purpose-Built Student Accommodation or PBSA

With a focus on providing excellent living experiences, PBSA has established itself as the most robust student housing entity, attracting significant demand from both domestic and international students. These accommodations come with inclusive amenities like high-speed Wi-Fi, shared workspaces, efficient building management and security, state-of-the-art gyms, vibrant recreational zones, and a host of other amenities. The best-in-class features result in better tenant retention throughout their studies. Consequently, investors can consider venturing into student housing in the UK in a simplified and hassle-free way through PBSAs.

Student House of Multiple Occupancy or Student HMO

This type of housing is similar to a shared house with shared living space, kitchen, and bathroom. In order to accommodate as many tenants as possible, property owners usually renovate older terraced residences, which often results in small bedrooms and public spaces.

Why Should You Invest in Student Housing in the UK?

As per a report published by the UK Parliament, the higher education sector in the country has witnessed significant growth with almost 2.86 million students choosing the UK for their academics between 2021 and 2022. Consequently, the demand for top-notch student accommodation has also increased. Here are some of the reasons why investing in student housing in the UK can be a lucrative opportunity for major stakeholders:

1. Steady rental income source

A consistent source of rental income is one of the benefits of investing in student housing. Students typically sign fixed-term leases that guarantee landlords consistent returns for the duration of the lease. A study by Savills claims that PBSAs in the UK consistently outperform other segments of the property market, generating net returns of between 4.5% and 6.5%.

2. Possibility for capital appreciation

Property values are rising gradually, with the potential for long-term capital growth, due to increasing demand and limited supply of student housing in desirable areas.

3. Tax benefits

Student accommodation owners in the UK may be able to deduct some costs from tax, including mortgage interest, property management fees, and maintenance costs. In addition, individuals can rent furnished rooms in their property for up to £7,500 a year tax-free through the UK Government's Rent-a-Room Scheme.

4. Enhanced rental yields

Studies show that PBSAs have continuously outperformed other property market segments in the UK, generating a significant amount of rental yield. Due to the increased demand for high-quality housing in desirable areas close to colleges, landlords can raise rental prices and increase their rental yield.

5. Portfolio diversification

Including student property in the investment portfolio diversifies it, reduces correlation with traditional assets, and increases stability, thereby potentially improving risk-adjusted returns.

Latest Opportunities for the Student Housing Market in 2023

Check out the latest opportunities in the student housing sector in the United Kingdom that might help investors gain higher returns on investments in the days to come:

1. The primary topic of discussion at the recent Student Housing Conference panel was the unlikely drop in new construction costs in the near future. The focus is shifting to re-purposing historic structures such as abandoned hospitals and warehouses to cater to the rising demand. The UK has a large number of houses that are ready for conversion, presenting new prospects for the HMO market as more and more students look for reasonably priced accommodation with basic amenities.

2. To solve the ongoing problems with student housing in the UK, CBRE highlighted the need for innovation and technology. With rising rental prices, technology in particular is necessary to facilitate affordability and increase value. Technology offers several ways to decrease costs, from improving customer service to centralizing operations and leveraging data for optimal energy use.

3. Collaboration between universities and real estate developers is another important way to move the industry forward. The construction of modern, purpose-built housing and amenities can be accelerated through city-wide collaboration with an emphasis on student well-being and key ESG factors.

4. Due to continued rent growth and stronger residential ESG regulations, the sector will see an increase in renovations of old and substandard properties, demonstrating the wide range of prospects in this dynamic and ever-changing area.

Challenges in the Student Housing Sector in the UK

Despite the plethora of opportunities, this housing sector in the UK is facing a number of challenges, such as:

1. Impact of Brexit

Brexit has clouded the UK property market with uncertainty. However, the student accommodation market remains vibrant, attracting global investors who are actively acquiring PBSA assets.

2. Lack of student housing

Despite hosting renowned universities, the UK faces a serious shortage of student housing. With nearly half a million undergraduates and a quarter of a million postgraduates each year, currently, only about 20% of students can find accommodation at PBSA, leaving many to stay in substandard, poorly located properties.

3. Increasing construction costs

Construction costs, including materials and labor, continue to rise. To protect their margins, developers are increasingly exploring strategies such as modular construction to meet the challenges posed by current market conditions.

4. Government policy changes

Strict planning permission and government housing development policies present challenges in providing residential housing for students, particularly in areas with high land values and tight restrictions. For example, the Renters Reform Bill might pose challenges for private landlords of student housing, due to the uncertainty of whether they will be able to get their properties back in time for the upcoming academic year.

5. HMO licensing reform

Licensing for student accommodation varies between local authorities, creating a lack of consistency. The government's proposed extension of compulsory licensing of HMOs without rebates for PBSAs could significantly affect the industry.

6. Delays in project development approvals

Delays in the approval of housing projects can jeopardize investor returns due to increased costs, lost rental income, increased competition, regulatory changes, market saturation, reputation risks, and reduced liquidity.

Conclusion

To sum it up, there are several barriers and opportunities in this market. On one hand, student housing in the UK is experiencing a lack of supply as a result of fewer HMOs being available and the development of PBSA having stalled. However, investors still have their confidence in this market. PBSA is expected to continue to be a popular investment option and a core component of institutional investment portfolios.

All in all, it's time to make the smart move - invest in UK student housing and secure your financial future today! List your property with amber and diversify your investment portfolio.