PBSA: Premium Student Housing Asset of Investment Portfolios

Introduction

Purpose-built student accommodations, commonly referred to as PBSAs, are privately managed (and traded) rental residential properties. They are developed, acquired, renovated and managed by the PMGs (property management groups) solely to accommodate students during their higher education. PBSAs, unlike other on-campus and off-campus housing, have differentiated the ‘quality of student life’ to be their driving metric to standardise their ‘residential properties’. Student housing investments have gone from being an alternative investment avenue to a mainstream asset class. The following section describes the discrete metrics which make PBSAs an indispensable and premium asset class in the investment portfolio of the most formidable players operating in this space.

1. High ROI and Sustained Capital Gains With PBSAs

The growing demand for higher education and the reduced age of students emigrating to first-world nations has surged the global demand for purpose-built student accommodation. The high demand, development cost and intricate value chain of PBSA markets create high entry barriers. However, the limited supply of PBSAs makes the yield from student housing much higher than other commercial or residential sectors. In this scenario, the market shows signs of a two-pronged correction.

Internal Corrections

Developers are trying to convert fire stations, hospitals, commercial assets, hotels & many more properties to PBSAs, which are incurring lower development costs. This is a less expensive diversification with PBSA asset class, making it a value-added investment. To highlight an example, many empty offices in Coventry are to be transformed into PBSAs.

Regulatory Corrections

• Local governments are easing the regulations on PMGs, to encourage restorative constructions of pre-used properties. One of the reasons for the government support is that sustainability can be integrated into purpose-built student accommodation projects aiming toward net zero emissions through real estate investment trusts (REIT) and real estate operating companies (REOC).
• The global demand for PBSAs among international students has seen a year-on-year increase as universities have increased their student intake. This has ensured a higher rental yield from PBSAs compared to other residential and official sectors.

Amber's Student Housing Report 2023 makes a comparison of the relative rental yield of PBSAs compared to that of official and residential sectors.

2. Stronger Retention Rate With Purpose Student Accommodation

Over the last decade, the universities have amplified their student-intake, but have yet to be able to expand on-campus accommodations to meet the demand. Purpose-built student accommodations have become the most sought-after off-campus properties from both the demand and the supply side, because of the irreplicable combination of convenience, safety, amenities and location provided to the students. Even through high market volatility, student property operators, universities and investors have found it profitable to hold on to student housing investments for the long haul.

PBSAs have a strong retention rate among students as they do not leave their PBSA units easily through the tenure of their studies. It brings rental guarantees to PMGs and the high ROI and fewer risks attached to student accommodation investments make it a lucrative option for investors. On the other hand, the strict policies and meticulous contractual obligations ensure rental commitment from students. It requires students to name a guarantor to cover the rent amount in case they default, which safeguards the interests of the PMGs.

 To exemplify

• During the pandemic, universities suffered heavy losses from their empty student accommodations. Faced with this crisis, the University of Sydney and Trent University (Australia) sold off their student accommodations. But UK Universities held on to their PBSAs even through the hefty losses.
• As the pandemic subsided, students returned to their campuses. Students in Australia were at a complete loss and had no place to live as their previous accommodations had been sold off. Meanwhile, students in the UK quickly settled in and filled the houses. It brought more income for the universities to recover losses due to the pandemic and even make a premium.
• It showed that, in the long run, PBSAs always regain their high demands, making them ideal for the long-held asset class. At this stage, two metrics deserve mention-
  1. ‍Market Sensitivity- Universities are decoding the housing market and increasing their partnerships with PBSA developers to serve the surging housing demand. For instance: On February 13, 2023, the Toronto Star reported that Trent University was seeking quotations from developers to provide 900-1300 beds across two campuses while also revealing their plans to open a new campus. (Source: Toronto Star)‍
  2. Market Insularity - Despite global crises and recessive markets, PBSAs as an asset class, tend to bounce back with rental yields (6-7%) that exceed capital value, according to Unite’s 2023 Q1 report. Such insularity has made PBSAs the mainstream asset class in high-net-worth investment portfolios.

3.  Purpose Built Student Accommodation - A Mature Market

The transformation in the purpose-built student accommodation market has made it a mature avenue in terms of investor opportunities. A mature market helps sustain a steady value chain of stakeholders at every stage of the business. It starts right from the collection of seed capital and raising of equity shares from the market, through the development of the PBSA up to contracting listing companies like amber.

Mature assets like student accommodation investments promise a high percentage of growth in a fixed period, having accounted for market volatilities. It also implies a stronghold of standardization and regulations on PBSAs ensuring adequate compensation upon any conflict of interest between stakeholders. Moreover, student housing as a whole is considered a safe proposition in times of economic downturns and recession owing to its countercyclical nature.

4. Differentiated Stakeholder Participation

A mature market is inclusive of stakeholders as well as investors. Some of the supply-side stakeholders for purpose-built student accommodation include private equity funds, high net-worth investors, government investment funds, landowners, architects and BI specialists. However, the demand side of the market is niche and tricky, requiring property managers to formulate their portfolios within the marketplace. The stronger the agent the more the visibility and selling viability of the property in the global market.

5. Long Post-Purchase Retention in PBSAs

Students, primarily in their first year of college tend to stay in purpose-built student accommodation. However, it is often observed that the students are choosing PBSA in the following academic years as well. There are four major reasons why PBSAs are popular amongst junior and senior students alike:

1. Convenience- PBSAs only host students, thus helping them live in a community of people with similar lifestyles, preferences and routines. The student tenants prefer the arrangement of periodic stays, giving consistent opportunities for the operators to moderate their rents every year.
2. Safety- PBSA provides a secure and monitored student space through on-site security management.
3. Location- PBSAs are located very near to college campuses and in student-friendly neighbourhoods, helping cut down travelling costs and presenting job opportunities for students in the same neighbourhood. Moreover, the closer these properties are to the university, the more rental premium they can acquire.
4. Comfort- PBSAs provide exceptional amenities of comfort including social lounges, study rooms game rooms, cinema rooms, and prompt onsite maintenance staff. Most of these amenities are included in the bills and require students to pay before the market rates.

International Education has developed over the past decade with the rising uptake of international students. The global count of foreign students was 250mn in 2020 and rose to 280mn in 2023. It is projected to reach 380 million in 2030, and 594 million by 2040 (as quoted from amber housing report 2023; page 21).

• Student Housing is the most inherently allied product to foreign education, with the global transactions in PBSA amounting to a towering 75bn in 2022 (amber Student Housing Report) and promising to rise at a CAGR of 4.95% up to 2027.
• In 2022/23, when Greystar and GIC acquired Student Roost, its aggregate value was reported by Knight and Frank to be £541,590,000/-.
• The continuous big-ticket transactions in the PBSA market show a hopeful picture and an immense market potential that is yet to be realised.

Conclusion

The purpose-built student accommodation market has been creating a chain of service providers centred around its core product of student housing. Such interdependencies amplify the impact of the product so that every transaction helps the market mature and diversify favourably for stakeholders. This is what makes PBSAs a premium asset class in student housing. The profits from the PBSAs can be further amplified by listing with amber.

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