Student Accommodation Market: A Bubble or A Boon

Introduction

Student accommodation has been a keen topic of discussion and survey in recent years. Many investors and institutions are entering the student accommodation market. PBSA (Purpose-Built Student Accommodation) is one of the fastest-growing sectors of the real estate investment market. Moreover, the sector has grown significantly in past years, attracting private investors. The rising investment raises the question if the student accommodation sector is experiencing a bubble. Let’s explore the current scenario of the student housing market in detail, whether it is a Bubble or a Boon.

1. The Current  Situation

The student accommodation market is growing faster than other real estate sectors, outperforming the retail sector regarding investment. According to student accommodation news, many A-level students celebrated as they achieved the grades they needed to be accepted into their preferred universities. The companies hope that their future landlords celebrate as well. 

In the past year, the market for PBSA has been doing very well despite challenges in the real estate sector. According to MSCI research, Institutional buyers have invested more in PBSA than retail assets. Unlike other real estate, which has seen declines in value and investment, PBSA keeps attracting many student housing investments.
As per PBSA news, the two major real estate investment trusts in the PBSA sector are doing well. Empiric Student Property (ESP) had strong interim results that exceeded expectations, resulting in a rise in its share price. Unite (UTG) also reported positive results and announced a £300 million equity raise, the first time in over a year.
A high record of university admissions and a limited housing supply drive the student housing investment. Long queues for accommodation are unfortunate for students, but for landlords, they are indicative of the high demand in the market. Moreover, the decrease in supply combined with the increase in student population is leading to strong rental growth.

2. Demand and Supply Imbalance

The demand and supply imbalance is one of the major issues in the student accommodation sector. In addition, rent controls, tougher control of immigration policies from the government, and rising university fees also inhibit the demand. 

Supply and demand imbalance can be seen in the UK student accommodation through Coldwell Banker Richard Ellis's (CBRE) research.

• Major UK cities are facing a shortage of more than 350,000 beds. Due to the high demand for student accommodation, delivery is delayed.
• The shortage of beds in Greater London is around 106,000 and has increased by 45% since the 2017/18 season.
• Only 2,900 new beds have been delivered in Bristol since 2018, but the demand for PBSA has risen by 8,000.
• Similarly, 3400 beds have been delivered in Glasgow since 2018, but the requirement has grown to 13,000.
• Moreover, Manchester has one of the most extreme supply and demand imbalances of student housing, with a shortage of 23,186 beds. 

A decrease in deliveries is part of a long-term trend where fewer new projects being introduced into the market. Just 50 new developments will be completed in 2023/24, which is half the number delivered in 2016/17.

PBSA news states that the primary reason for this shortage is that new PBSA units are not keeping pace with the increasing number of students. Demographic changes are the major factors. Moreover, the demand is also fueled by the increasing popularity of UK universities. Students, especially from China and India, prefer further studies abroad.
Demand has increased while supply is lacking. HMOs (Houses in multiple occupations), which used to accommodate many students, have a shortage compared to the increasing number of students. This is partly because councils strongly disapprove of this sector. In addition, councils implemented effective restrictions on buy-to-let landlords converting their homes into HMOs for students. Furthermore, interest rate hikes and changes in legislation are causing some private landlords to leave the market.

3. PBSA is filling the housing Gap

Operators of PBSA have stepped in to address this issue, but meeting the demand is challenging. Challenges arise due to a restrictive planning system, increasing construction expenses, and the recent rise in debt prices. As per PBSA news, Unite opted to raise £300 million from the equity market for development instead of approaching banks due to the high interest rates they offered. Moreover, the delivery difficulty has caused complications for companies like Watkin Jones (WJG), who profit by constructing and selling PBSAs.

However, the supply shortage can be positive for companies that own a significant amount of PBSAs, like Unite and Empiric. Supply shortage can hinder growth in some ways but also fuel the demand. Moreover, this shortage also enables the rent to rise by 7% and 9% for the upcoming academic year. Empiric's CEO, Duncan Garrood, stated, "the increase is notably higher than what was previously expected."

4. Rent Control and Political Factors

Rents have skyrocketed unprecedentedly, prompting calls for rent control. According to student housing news, prominent politicians like Andy Burnham and Sadiq Khan have called for rent controls to protect students from soaring accommodation prices. While this may benefit students, it could harm companies with significant investments in PBSA.Even in the absence of caps, the increasing cost of higher education threatens the overall PBSA market as maintenance loans and grants do not align with inflation. This could lead to some students staying home while studying and others skipping university altogether.

5. Year-to-Year Lease and Market Sensitivity

PBSA has distinct features of a year-to-year lease structure. Furthermore, oversupply is still a regional phenomenon, which means that PBSA has a higher operational risk than other real estate assets. For instance, tenants often sign leases for offices,  warehouses or shopping centres long before a developer ever sets foot on the property, and the lease can last for decades. PBSA, on the other hand, is leased out to students on a one-year basis and only once the building is built.
Unite reduces the risk by entering into university nomination agreements. This ensures a consistent stream of students into their properties. Moreover, Empiric leases directly to students. They face a higher risk but also have more control over rent.

6. Challenge and Risk

The student accommodation market has proven resilient, but it is not without challenges and risks. The emergence of universities in East Asia, including the two Chinese and one Singapore in the world's top 20, could challenge international demand. Additionally, the UK Government's tightening immigration policy may also impact overseas interests. However, some claim that policies such as restrictions on bringing family members into the UK are unlikely to affect demand for single-bed PBSA.

7. Increasing fire safety cost

Another concern for PBSA is the cost of fire safety after Grenfell. The government has urged housebuilders to allocate billions of pounds to address the issue. According to student housing news, Unite and Empiric acknowledged their fire safety costs were higher than predicted. These companies are keen to pass on the costs to the contractors, whom they blame for the increase, but the final costs could still increase.

8. A Global Perspective

The global student housing market is projected to reach USD 147,000 million in 2027 at a CAGR of 4.95%. The student accommodation market isn't limited to the UK. It's happening globally as more and more students are moving abroad to pursue higher education. In some countries, such as India, a substantial investment is expected in student housing. The Indian student housing market is expected to grow to 31 million by 2036. The reason for this growth is the huge discrepancy between the number of students attending higher education and the number of hostel beds available in the country.

9. Role of Student Housing Booking Platform

Student housing platforms is also becoming more and more popular with the advent of International study programs. These platforms have become essential to connect students with the right accommodation, making student housing more convenient and efficient. This online booking platform provides thousands of verified properties, ensuring students find a safe living space. The booking process is simple and can be done in advance, giving you the peace of mind that you have planned your accommodation well ahead of time. Platforms such as student booking accommodation are growing at a fast pace and cater to the housing requirements of both Indian as well as international students. As a respected global brand, amber student accommodations also knows the value of customer service, which is why it offers the kind of service that customers deserve.

Conclusion

The PBSA market could slow down if there are any more bearish points. Traditionally, if there's a shortage for a long time, prices go up, and demand goes down. But the gap between the number of beds and number of students looks big enough to keep the sector going for at least another couple of years. Covid has shown how big a hit they can get from a sudden drop in demand, but it's also shown how quickly they can bounce back. 
It's important to understand the unique dynamics of the market despite bubble concerns. Factors such as the annual lease structure, global student demand and the long-term supply-demand gap make the market resilient. However, challenges like rent controls and external factors must be addressed for the student accommodation sector to grow sustainably. With investors continuing to scrutinize this market, a well-balanced approach that considers both opportunities and risks will only determine whether it's a bubble or a blessing.