While the BTR market in the UK is still in its infancy, the student accommodation market has come a long way in the last 27 years. Since Unite Students first started trading in 1991, we’ve seen the Purpose-Built Student Accommodation (PBSA) market grow to maturity, with 40,000 student beds worth £3.9 billion traded last year.

Investment volumes in 2017 were down 14% on the previous year. This was more a reflection of 2016’s strength rather than any weakness in last year’s performance – we still saw four portfolios with more than 1,000 beds trade, each of which sold for more than £100 million. Some of those larger, more complex deals slipped into the first quarter of 2018, which will help drive performance this year.

Based on transactions undertaken to date and those still to complete, we predict that 50,000 PBSA beds will trade in 2018, with a total value of £5.25 billion. Once again, this has been driven by major national portfolios, such as the Enigma, Colorado, Mayflower and Stellar portfolios.

Yields tightening

Yields on PBSA deals continued to track down last year. The volume-weighted average yield in 2017 was 5.7%, reflecting a 4.5% spread to 10-year gilts.

The first half of 2018 suggests yields are tightening further, with yields averaging 5.5%. That also represents a narrower spread to gilts, 4.0%, which had already begun to rise in anticipation of higher Bank of England base rates announced in August.

There are many elements to PBSA's attractiveness as an investment. The student demand pool is constantly evolving as student numbers generally continue to increase, as planning consents become harder to achieve and build costs rise (limiting competition), and as the affordability, location and specification requirements of students broaden.

However, PBSA faces its fair share of challenges and obstacles too. We delve into two of the main hurdles here: tightening planning policy, and the shifting shape of demand.

Planning

London

Sitting outside the traditional use classes, historically, PBSA hasn't had to face significant hurdles in the form of Section 106 affordable housing contributions. In London, that’s all set to change with the draft New London Plan.

For some time, new student developments in the capital have had to satisfy one of two criteria to get planning permission: providing affordable student housing, or showing they have a nominations agreement with a London university. As it stands in the draft New London Plan, schemes will now need to satisfy both these criteria.

Schemes will be eligible to use the Fast-Track Route through viability if at least 35 per cent of beds are affordable. Any fewer, and developers will have to take their scheme through viability testing.

While these changes make it harder to develop PBSA in London, that doesn’t mean a complete stop to PBSA investment and development activity. In last year’s Spotlight we suggested PBSA investors may want to diversify their offering into Build to Rent or co-living. The draft plan appears to support this approach. Schemes that don’t have a nominations agreement in place can still ago ahead as large-scale purpose-built shared living.

This could open up the range of potential residents to more than just students, just as The Student Hotel has done across mainland Europe. It allows investors to make their affordable contribution as a cash payment in lieu, rather than providing beds on site.

However, it still leaves schemes subject to late-stage review mechanisms and planners understanding the economics of schemes designed to drive rental income rather than sales values, as discussed above.

These planning proposals sit in direct conflict with the latest National Planning Policy Framework. Whether inspection dilutes the proposals or the Mayor is forced to back down.

We’ll have to wait and see whether consultation on the New London Plan dilutes these proposals. Regardless, they suggest the direction of travel is changing. PBSA developers can no longer count on being exempt from affordable housing contributions or other planning obligations.

Regions

Outside London, the planning outlook is somewhat rosier. The new National Planning Practice Guidance clarifies that local authorities need to account for housing need from students in their local plans. It also allows them to count student housing toward their housing delivery targets, on the basis that it frees up existing housing elsewhere.

New planning policy puts greater pressure on local authorities to meet their housing need. Given that they can count PBSA toward that figure, this should mean we see local planning authorities take a more proactive approach to working with student housing developers - as in the BTR sector.

Demand

Demographics

We predict that domestic demand for full-time undergraduate courses is likely to dip in the short term. That’s simply down to demographics: there’s fewer people just below university age getting ready to apply.

The number of 18 year olds is set to reach a trough in 2020, with a knock-on effect on student numbers. But beyond this blip, the trend is for the number of UK 18 year olds and university applicants to carry on growing over the next 20 years.

There are three levers the Government and universities can pull to help deal with falling numbers of 18 year olds in the short term.

They can increase university participation rates. Full-time undergraduates accounted for 47 per cent of the 18-20 population in 2011; by 2017 that proportion was 53 per cent. If universities can broaden their appeal to more of the population, they could attract a high enough proportion of younger people to counter the demographic dip. Government assistance, in the form of maintenance grants for lower income students, for example, may help further.

Universities may be able to attenuate the effect of this shortfall by increasing acceptance rates. But that presents its own set of risks: undergraduate demand is most robust at universities with high entry requirements and strong academic outcomes. Balancing accessibility with exclusivity will be an ongoing challenge for providers.

And they can increase international student numbers. The Government has offered to continue welcoming EU students to the UK through Erasmus in the latest Brexit White Paper. Pressure to exclude international students from immigration targets continues to pile on Government, whether from universities, the House of Lords, or their own ministers. With strong rankings on international league tables, the UK’s universities are well placed to grow their share of the international student market if they’re given the freedom to do so.

Obsolescence

Not all student schemes are created equal. Across multiple university cities, we’ve seen the supply of PBSA edge closer and closer to meeting current local demand. With that aforementioned demographic dip approaching and Brexit uncertainty still hanging overhead, this will lead to competition between schemes to attract residents.

That’s unlikely to be a problem for the best located schemes, situated right on campus or in the heart of the town centre. Nor will it be an issue for the more affordable, value schemes, nor the best designed.

But for schemes that don’t satisfy one (or more) of these criteria, maintaining high levels of occupancy will be challenging.

Lots of movement in the league table

Once again, we’ve seen significant change in our student housing development league table this year. Just like last year, more cities have fallen down the rankings than risen, reflecting an increasingly challenging market for developers.

The First Class category holds those cities with the very best prospects for student housing development. Nottingham and Reading join this rank this year. They’ve seen relatively subdued levels of PBSA supply in the last few years while student demand has grown, creating opportunities for new schemes in those cities.

London remains in the top tier, in spite of the greater challenges imposed by the draft New London Plan. While it will become more difficult for schemes to get planning permission, those that receive approval will be especially attractive opportunities.

The universities of Exeter, Leeds, and St Andrews have all dropped into the Upper Second category as a result of strengthening supply pipelines there. They’re joined by Glasgow, Leicester, Northampton, Norwich and Stirling moving up the league.

Derby and Loughborough have climbed to the Lower Second category, to join cities such as Cambridge, Canterbury, and Portsmouth from above.

Liverpool has experienced a reversal in fortunes this year, bouncing back into the Third Class category. While the pipeline of new PBSA development there still looks large, several schemes have gone through a change of use into mainstream residential or Build to Rent, meaning a less crowded market.

We develop our league table by looking at the ratio of student housing to full-time student numbers, the PBSA development pipeline, affordability, rental growth prospects, local planning policy, and demand for competing land uses.

As such, it is helpful as a general indicator of how attractive a city is for PBSA development, but the suitability of specific schemes within each city will vary.