Knight Frank Forecasts Strong Growth in UK PBSA Sector Despite 2023 Investment Dips

Knight Frank, a global property consultancy, has predicted significant growth in the PBSA sector, which is the Purpose-Built Student Accommodation, by the year 2028. This growth is estimated to have a value of £104 billion. The study conducted by the London-based real estate company consisted of student properties that are currently in operation in the UK, under-construction buildings, and the average rents that can be accumulated through these UK student housings. According to the latest PBSA news, for the year 2023, the UK PBSA is valued at £85.8 billion.  

In Q3 2023, about £1 billion was traded across 20 transactions, up 23% from the same period last year. However, year-to-date investments are 48% lower than in 2022 due to a slow start this year. Student numbers growing faster than available accommodation is attracting capital into the sector, even though deal structures are adapting to challenges in borrowing. 

Neil Armstrong, Joint Head of Student Property, Knight Frank, has stated,” As we witness a long-term growth in the number of students, the shortage of beds drives the capital investment in the UK PBSA sector. Following the subdued start to the year, a healthy appetite from investors has been recorded in the third quarter with over £1bn trading hands. Given the PBSA sector’s counter-cyclical nature, investors continue to look at it from a favourable perspective, and thus, the market acts as a wall against inflation.”

Excluding the Singapore Press Holdings (SPH) Portfolio, which includes acquiring SPH businesses as a whole. It also occurred during the first nine months of the year 2022 valued at £1 billion, this year’s decline in year-to-date volumes for 2022 appears much less significant. 

Quoting Katie O’Neil, Head of Student Property Research from Knight Frank, A loosening in the labour market and better-than-expected inflation figures contributed to the first decision in September to pause rate hikes, in line with the stance taken by the U.S. Federal Reserve (FED). Whether interest rates have peaked will depend on whether the downward trend in inflation holds, but positively, the Bank of England’s forecasts imply that base rates will remain at this level until Q3 2024. Any period of stability – and the confidence that will bring – will bring a more competitive pool of buyers back to the market in Q4 and into 2024.”

The 44 deals have been closed to date, which is by far the highest average when compared to the last five years of 40 transactions from January to September period. Over 25 potential opportunities tracked till this year’s end, the Knight Frank anticipates around  £1 billion in closings which will lead the total to £3.2 billion for 2023 UK PBSA investments. 

A notable trend noticed a continuous rise in forward commit, forward funding, and joint venture deals. This accounts for 25% of the total volumes in Q3. There is a positive difference of a remarkable 12% when compared with the numbers last year. This shift is driven by higher borrowing costs, leading to more forward funding and joint ventures as attractive avenues to enter new markets or sectors and diversify risks for current owners.

“While investors continue to seek exposure to the market, the increased cost of debt continues to put pressure on deal structuring. Consequently, we are seeing more forward funding opportunities come forward. We also expect joint venture strategies will rise in popularity as the year progresses as an attractive route into new markets and sectors, as well as a way for existing owners to diversify risk.” says Merelina Sykes, Joint Head of Student Property, Knight Frank.