A new student housing report from global real estate firm JLL has revealed that the outlook for UK PBSA (purpose-built student accommodation) is positive, with strong occupier demand forecasts set to attract continued investor interest in the sector
However, challenges remain as a fall in construction levels and rent affordability are impacting development activity.
With rising demand for higher education, JLL predicts that full-time student numbers will rise by a further half a million by 2030. As such, PBSA has become a lucrative ticket for real estate investment and, according to the company’s Student Housing Report, investor appetite remains robust due to its defensive, income-producing characteristics.
But it’s unlikely to be entirely plain sailing thanks to a decline in development pipelines and growing rent affordability concerns.
A fast-growing market
PBSA now represents one of the standout markets within the wider real estate sector, according to JLL, with 31% to be invested in the sector of the £8.8 billion of additional investment into living sectors expected over the next two years.
While growth in supply has been accelerating substantially over the past five years, this is set to slow and the rise in demand will widen the gap between available beds and total numbers.
JLL is forecasting a 27% increase in full-time students in the next decade, equivalent to an extra 40,000 students per year. Despite this, the number of developments reaching completion is slowing and current development pipelines for 2019/20 report just 26,610 new beds.
This challenge is intensified by increasing construction costs, which have in part contributed to a 25% drop in construction levels over the last three years.
Huw Forrest, director of Living Capital Markets, Student Housing at JLL, said: “Student housing has become one of the most standout performers for investors in the commercial and living sectors and the overall outlook in the UK remains positive. JLL forecast an increase of 500,000 full-time students by 2030, supported by a government targets for 35% increase in international numbers. Home to 18 of the world’s top 100 universities, the sector has a bright future ahead, but investors need to focus on the right investment and development decisions.”
The private sector is expected to have a crucial role to play in helping to address this problem, with private investment in the PBSA market already at an all-time high.
For the first time, university-owned beds now account for less than half of the PBSA market supply in the UK – and have grown by only 6% since the 2014/15 academic year.
Of the 331,000 privately-owned beds, just under 91,000 are leased to universities or have a nomination agreement in place, whilst 241,000 are direct let.
The UK’s higher education market isn’t without challenges of its own – for example the potential impact of post-Brexit research funding and rising student tuition fees - but the growing pool of domestic demand and potential participants globally means the UK is well-placed to succeed, JLL says.
James Kingdom, associate director at JLL, believes that the PBSA market can benefit from the current volatility and instability we are facing. “In our current economic and political climate, investors are looking for stable, long-term income providing assets that are underpinned by strong demographic trends,” he argues. “PBSA and the broader student living economy remains one of the most attractive prospects in the living sector and we hope to see universities continue to work in partnership with private developers and investors to deliver new student accommodation across the UK.”