As a backdrop of uncertainty continues to put some of the more traditional sectors under pressure, student accommodation’s resilience has come to the fore.
In 2017, the sector generated more than £4 billion of transactions, including the purchase of both the Enigma and Unite portfolios by Brookfield for a combined price of more than £800 million. However, now that many of the major operational portfolios have been recently traded, investors and developers will be judging which opportunities and locations make the grade for investment and development. GVA’s annual research report on the sector examines the fundamentals that continue to drive performance and that will shape student housing in 2018.
The report reveals that demand remains strong, driven by the ongoing strength of the UK higher education system. One of the biggest threats to the sector is speculated to be Brexit, and although applications from EU students fell by 2% in 2017, it is unlikely that withdrawal from the EU will have a substantial impact on the investment case for student housing. EU students comprise only 6.5% of all full time students, this is a relatively small percentage overall and forms only a part of the story for foreign students. For context, Chinese students currently account for 5.5%, a percentage that is on a growth curve and likely to increase further.
More noteworthy to investors is the ‘flight to quality’ that has been witnessed in student numbers over recent years, as medium and higher tariff institutions, a UCAS measure that reflects the levels of academic attainment, have experienced an increase in acceptances, while lower tariff providers have seen a decline. There was a 0.4% increase proportionally for higher tariff providers, 2.3% growth at medium tariff and a decrease of 5.4% at lower tariff. This is partly attributable to students placing increased emphasis on getting value for their money, as the cost of attending university has increased greatly since the changes in tuition fees, and will likely lead to clustering around certain cities.
A similar story of clustering and polarization is occurring in the development landscape of student housing. While demand for proven, income producing assets has grown over the past 12 months, the market for forward funding has remained challenging. Investors are taking a more cautious approach to these transactions, particularly in studio schemes in cities with only one university. As such, there are a number of forward funding opportunities across the UK from 2017 which have failed to attract the necessary levels of pricing to be viable. Development is instead focussed on cities that offer educational hubs through multiple universities and thriving student populations, such as London, Manchester, Edinburgh, Birmingham and Bristol.
Further, a key factor that will influence the development of new stock in 2017 is the ongoing challenge posed by the UK construction market and the rise in tender prices. However, applicants are placing an increasing emphasis on the student experience and accommodation quality, and it has now been included as a consideration in some university league tables. Therefore, while opportunities to commence new builds will be reduced, there will be considerable opportunities for investors to work with universities to improve or rebuild existing accommodation.
Roger Lown, GVA Head of Student Housing, commented: “2017 has been another strong year for student housing, and 2018 is likely to continue in a similar manner, with demand in the sector being underpinned by purpose built student accommodation’s strong cash generating characteristics and its reputations as a ‘safe asset’. Demand for bulk is likely to continue, therefore portfolio’s will likely still be in high demand, as will income-producing proven assets in strong university cities and schemes where asset management initiatives can be undertaken to drive rents and values.”