Buyers are competing to add student accommodation to their portfolios and make the most of the excellent rental returns on offer in this under-resourced asset class.
This year marks a pivotal point for the student housing market sector as the cap in student numbers is being scrapped from September 2015, meaning more students can apply for more places at more universities.
With 800,000 children born in 2012 – the highest number since 1991 – this could mean a further boom in potential student numbers by the time they turn 18 in 2030, and they are all going to need somewhere to live, making now the ideal time to consider buying into student accommodation.
One in four full-time students live in purpose-built student accommodation1, and they now have more choice in the form of private sector providers in the direct-let market or operators who run accommodation on behalf of the universities themselves.
“The student housing market has already experienced a surge of investment activity in recent years, thanks to an increase in purpose-built accommodation which has significantly added to the housing stock in cities such as Sheffield and Leeds – but there are still gaps in quality in many areas,” says Mark Ivimy, PrinvestUK’s business development manager.
“Despite an improvement in the quality of accommodation that universities and operators have to offer, there is still a substantial amount of poor quality student housing. In towns and cities such as Bradford, Cardiff, and Glasgow this offers a significant opportunity for operators in the market to expand and take market share from these lower quality and poorly located blocks.”
We can’t count on government spending to fill these gaps. “The recent election of a majority Conservative government means there won’t be any structural investment in universities, limiting the capital available to these institutions to build new accommodation,” says Aaron Campbell, PrinvestUK managing director.
“That’s fine in cities such as Oxford where the universities have enough resources to develop their own accommodation projects, but outside these key places it becomes vital for buyers and developers to help plug the gap in undersupplied markets.”
“It all depends on land values and lack of supply,” says Ivimy. “If the market isn’t undersupplied in an area then there’s little point in developing student accommodation, which is a problem that we’ve seen in over-saturated towns such as Liverpool, where bespoke facilities have been built, not been filled, and then the developers have had to apply for a change in their use to general residential.
“On the other hand, one area that is ripe for investment is Glasgow, which currently has a chronic shortage of student accommodation with only 9,395 purpose-built beds for the fulltime students who attend the four main higher education institutions there.
“For example, City of Glasgow College is increasing its capacity from 32,000 to circa 40,000 students but is only building capacity for 200 more beds– on its Riverside campus – as it thinks the private sector will fill the gap.”
These gaps are going to be stretched even further by increasing numbers of overseas students. There are currently some five million overseas students studying in the UK, which UCAS says is a 7 per cent increase in the applications from abroad over the past year.
“They typically come here because they want the kudos of gaining a degree from the UK’s prestigious university system, but they’ve also got deeper pockets, are willing to pay more for their entire education experience and want better accommodation,” according to Ryan Murphy, PrinvestUK’s investment sales manager. “This means purchasers are seeing a boost to their returns from overseas students who are more willing to pay the premium rents that these kinds of properties command.”
Many operators focus solely on the higher growth overseas student market, but for those that manage to build a product at a price that is attractive to the more cost-conscious domestic market, there is also a potential market for a further 290,000 beds across the country2.
“Overall, only about 22 per cent of students get university maintained accommodation, and these are predominantly very dated,” says Murphy, “so while ordinary flats and apartments are an option for students to rent, it is clear that the benefits of purpose-built student accommodation are many: a convenient location to the university, high-spec rooms, and better on-site facilities.”
Investment groups and institutions cottoned onto the benefits of this asset class decades ago, and in more recent years traditional buy-to-let landlords have been diversifying into the student market, attracted by the huge returns generated by the growing demand.
“The first five months of 2015 saw £4.2bn invested into the sector,” adds Murphy, “£2.4bn of which is accounted for by only five separate deals made by institutional purchasers or wealthy private individuals attracted by a price that ensures them a stable rental return of around 6 per cent per annum. This return has increased every year, and with the cap in student numbers being scrapped we are going to see more students and, therefore, more demand for purpose-built accommodation.”
“Thankfully, when it comes to returns on investment the student market is non-cyclical – unlike bonds and equities – and has proved to be the only asset class that has produced growth in the last eight years of economic downturn,” says Murphy. “This is why the majority of buyers choose the student accommodation asset class because the net returns are very attractive.”
Another advantage is that the properties are fully managed, so buyers can be confident that the accommodation will be overseen by experienced operators who find the tenants and organise maintenance and contractors, keeping the overall costs to a minimum and improving returns for the purchaser.
“Ultimately,” says Murphy, “we consider this a great asset class for purchasers to consider because there is a strong demand and undersupply of accommodation to start with, it offers a fixed rental return, and we only work with experienced developers and operators.”
To find out more about investing in student accommodation call 0800 009 3080, or read about how we work with purchasers here.
1 Source: Savills' Spotlight on UK Student Housing, 2014
2 Source: Savills' Spotlight on UK Student Housing, 2014