Summary

• UK purpose built student accommodation (PBSA) has continued to show that it is counter-cyclical, with growth in student numbers during a time of economic uncertainty.

• Domestic student demand is at an all-time high, but the supply of stock in the private rented sector (PRS), for example HMOs, is constrained and contracting. There is an opportunity for PBSA owners to meet that excess demand by providing a product at a price point that is attractive to domestic students.

• The latest UCAS application data shows continued growth in the number of domestic students and high-value international students.

• There is also huge positive sentiment amongst investors, with a significant weight of dry powder targeting the sector, and demand for student portfolios actually outweighing the supply of stock.

How has the student population evolved in the past two years?

2020/21 – The largest first-year intake on record

2020/21 saw the UK’s total full-time student population grow by 8.0%, based on the latest data from HESA. This continues a trend of accelerating student population numbers seen over the past few years.

There was a particularly large intake of first-year students: over 630,000 full-time undergraduates started in 2020/21, and more than 340,000 full-time first-year postgraduates. This is the largest intake on record by a substantial margin and is perhaps, in part, due to weaker employment prospects during Covid-19 increasing the appeal of higher education.

How did acceptances translate to enrolments in the Autumn of 2021?

2021 was a record year for UCAS applicants, reaching almost 750,000. From these, there were 560,000 acceptances, the second highest number of acceptances on record.

While UCAS numbers show most undergraduate applications, there are also deferred entries and alternative application routes, so the actual number of first years will be slightly higher. UCAS acceptances typically represent c.92% of enrolments, so we estimate the total number of full-time undergraduate first years in 2021/22 to be just under 610,000.

Domestic and non-EU international acceptances both grew, by 1.4% and 2.4%, respectively, while the number of EU acceptances halved. This pattern has been anticipated since the UK’s exit from the EU, and the strength of domestic and other international demand has helped broadly maintain total intake.

Traditionally, PBSA has been disproportionately occupied by international students, so the strong growth in that segment should mean solid demand for purpose built accommodation.

What do we project for Autumn 2022, based on the January ‘21 deadline?

2021 and 2022 are the only two application cycles in history where we have seen over 600,000 applicants by the January deadline (616,000 and 611,000, respectively). 2022 also continued the pattern of domestic and non-EU international students growing strongly, while EU numbers reduced – a trend that shows little sign of changing.

Around 80% of UCAS applicants have usually applied by January. If this holds true in 2022, it would mean more than 760,000 applicants in this full cycle.

Acceptance rates are typically about 77%, so based on these assumptions, we project more than 580,000 acceptances and just over 630,000 enrolments in Autumn 2022 (as there will also be deferments and alternative application routes). This would mean three years in a row with over 600,000 first-year undergraduates, and (in Autumn 2022) a total of 1.75 million full-time undergraduates across all years.

What does this demand mean for PBSA?

These elevated student numbers will create enormous pressure on university accommodation. The demand is also coming at a time when supply of rental stock in the wider private rented sector (PRS), e.g. HMOs, is becoming increasingly constrained. A combination of tax and regulatory changes has put pressure on buy-to-let investors, leading a lot of them to sell up.

Many universities will need to look to nominations agreements with the private sector in order to meet student demand. The growth in domestic student numbers creates a particular opportunity for PBSA operators, who could tap into this demand pool by providing stock of a different type and price point.

2021 finished on a high note, and hunger for assets remains strong in 2022

Investor demand for PBSA remains very high, with the final quarter of 2021 being the most active in the year. £4.1bn was traded through the full year, including the keynote deal of APG and Blackstone’s £969m acquisition of GCP Student Living.

In the last decade, the years with the highest investment volumes (perhaps unsurprisingly) saw large portfolio transactions, demonstrating the confidence in the sector. Since 2015, there has been at least one portfolio sale each year for more than £0.5 billion, with each of the last three years seeing a portfolio deal worth c. £1bn+.

There is still at least £14bn of dry powder targeting the sector. PBSA has a proven track record of income generation and a fundamentally strong demand outlook. Much of this capital is pursuing core or core plus returns, but there is little operational stock expected to come to market, and opportunities to purchase a portfolio of scale are even more limited.

The last few years have seen substantial consolidation in the PBSA market, limiting opportunities for non-platform buyers. As a result, we now expect market participants to make a meaningful move to a development cycle. While there are signs of this happening, there are also challenges to navigate.

Firstly, acquiring land for development is very competitive, with developers of e.g. Multifamily or Logistics often pursuing the same opportunities.

Secondly, build cost inflation continues to impact viability – Arcadis has increased its build cost inflation forecasts for 2022 and 2023 from 3% p.a. to 5% p.a. Material costs were the major contributor to build cost inflation in 2021, with energy prices and labour shortages now adding additional upward pressure. To mitigate these risks, investors will need to partner with developers that have a consistent track record and a strong handle on their supply chains. The natural result is either a reduction in land prices or tighter yields. At the current time, sharper yields is the market trajectory.

Development League Table – movers & shakers

As we move into a development cycle, which markets should investors target?

Our PBSA Development League Table shows the locations we believe are the most attractive for PBSA development. In line with the consistent patterns of student growth over the past few years, much of the League Table is unchanged since our last release.

The top tier cities have seen a combination of strong student population growth, a high student to bed ratio and/or a limited pipeline, so the need for new accommodation remains high. Bristol has moved up to the First tier: it has a reasonable pipeline, including some stock as part of the new Temple Quarter campus, mostly coming forward in the next three years. However, it has had well-publicised struggles accommodating its first years locally, resulting in some having to live in Bath. We therefore believe the city still presents a strong opportunity for further development.

Cities in the Upper and Lower Second tiers also have strong demand scores, but typically have more standing stock and/or a larger pipeline. Cardiff has moved up to the Upper Second, as the development over the last delivery cycle has been well absorbed and the pipeline is now limited, whilst there has been strong growth in undergraduate applications. Nottingham has moved down to the Lower Second, owing to its large pipeline of c.10,000 beds. Even though not all pipeline schemes will make it through Planning, prospective owners will need to be cautious about the extent of future competition in each market.

The League Table can help with prioritising opportunities for development, but that doesn’t mean that ‘lower tier’ locations should be ignored. A well-located scheme in a lower tier, close to university campuses or other amenities, with the right design specification and price point, can perform as robustly as a scheme in a higher tiered city.

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