Despite Covid-19, international demand for UK student accommodation remains strong from students and investors alike
PBSA capital flows
Investment into UK purpose-built student accommodation (PBSA) has grown dramatically in the last two years. The coronavirus pandemic will restrict investment activity in the coming months. However, with record activity in H1, we predict 2020 will still be a strong year for PBSA investment.
2020 will represent a new high in terms of PBSA investment activity. In May, Blackstone acquired iQ Student Accommodation in a £4.66 billion deal. This transaction alone is worth more than all the PBSA stock traded in 2016, 2017 or 2018.
This follows what was already a busy year for investment. 2019 saw the most investment in four years and was the second strongest year on record, with £5.4 billion traded. Much of this activity was driven by Unite acquiring Liberty Living from CPPIB in November, accounting for 40% of the year’s total.
Investment volume forecasts
Since March, investment has been subdued as people’s inability to travel as freely and conduct business have restricted activity. Operators faced disruption to their income, with many electing not to charge rent to students who left their accommodation early due to the pandemic. This has not halted expansion plans for many investors, however. In June, Unite raised £300m in equity to fund three new PBSA developments. In July, Kinetic Capital set up a £100m funding platform for PBSA.
Individual assets will make a greater proportion of deals as investors consolidate their platforms
Savills Research
Before the coronavirus pandemic, we were predicting investors would spend a total of £10 billion on UK student accommodation in 2020. The pandemic has paused some of that planned activity and we now expect to see some of it pushed back into 2021 and beyond. Reports on the number of overseas and domestic students taking their university places will give investors the data they need to make informed decisions starting early next year.
As major investors work on consolidating their platforms, we’re likely to see individual assets making up a greater proportion of transactions than portfolios.
Global capital flows
UK student accommodation remains highly attractive to international investors. 58% of the £17 billion invested between 2016 and 2019 originated overseas.
Investment flows into UK PBSA by origin of capital
This reflects the strength of the UK Higher Education sector in attracting overseas students. International student numbers rose 6.2% between 2017/18 and 2018/19, almost ten times as fast as domestic student numbers, underpinning demand for PBSA. Non-EU applications for UK undergraduate courses rose 10% between 2019 and 2020. Applications from China rose 24%.
Although the UK has been subject to political uncertainty in recent years, this is far from unusual in a global context. The UK’s strong underlying property rights mean it remains an attractive destination for long-term investment. US dollar- and euro-denominated investors also benefit from a currency advantage, given the short-term devaluation of sterling.
Over half, 59%, of investment in 2019 came from domestic sources. Unite PLC’s acquisition of Liberty Living alone comprised 41% of investment, with other UK investors such as Aberdeen Standard and M&G making up the balance.
Asia Pacific investors, mostly from Singapore, were behind a further 17% of deals in 2019. Investors from North America were unusually quiet: they were responsible for 8% of investment last year, compared to an average of 29% over the previous three years.
By contrast, we will see a return to overseas investors dominating UK PBSA activity in 2020. US firm Blackstone’s £4.66bn acquisition of iQ Student Accommodation is the largest private UK property transaction ever.
Rental performance
PBSA operators have suffered a hit to their rental income in 2019/20. Most providers have offered refunds or rent reductions to students who have had to leave their accommodation because of the pandemic. Unite’s rental income fell by £26.9 million due to Covid-19 cancellations; GCP REIT’s direct let rental income was 16% lower than budgeted for 2019/20.
Demand for student accommodation in 2020/2021 should be robust
Savills Research
The outlook for next year is considerably more positive. Demand for university places tends to rise when unemployment is higher. The UK’s 18-year-old population is now growing, following years of decline, while the participation rate continues to rise. This means a growing pool of potential university applicants. With 97% of universities planning to teach courses in person in 2020/21, demand for student accommodation should be robust.
Most operators have chosen to offer more flexible, single-term leases to students next year. This should help give students confidence that they won’t be locked into a tenancy if a second wave of Covid-19 triggers another lockdown, and operators will be able to justify higher rents as a trade-off for that flexibility.
Investment yields
PBSA investment yields have remained remarkably resilient against a background of political and economic uncertainty.
Prime London net initial yields dipped to 3.75% in Q1 2020, falling from 4.00% in Q4 2019. Since Covid-19 we have observed a divergence in values. Prime PBSA assets continue to trade at pre-pandemic yields. Secondary stock and assets in cities where institutions face greater financial pressure are seeing yields widen.
As student accommodation matures as an asset class, we have seen the type of capital targeting the sector change. As the balance of PBSA investors has shifted toward lower cost-of-capital investors such as pension funds and sovereign wealth, the downward pressure on PBSA yields has grown. Super prime regional PBSA yields were 4.75%-5.00% in H1 2020, 150 basis points lower than in 2012. At 3.75%, Prime London yields are 225 basis points lower than in 2012.
