There is continued strong investor interest in Purpose Built Student Accommodation (PBSA) across Europe, driven by rising total numbers of students and a strong growth in international student numbers.
We expect this trend to continue over the coming years, as the number of young people (15-19 year-olds) is forecast to rise by 5.8% by 2027. At the same time, many European markets are facing a significant undersupply of PBSA stock, which is resulting in strong rental growth.
These factors are driving investment in the sector, which has risen by 16% in 2022 (until Q3) compared with 2021. The average provision rate across European cities is currently 12.5%, down from last year’s 13% figure. Across the European cities Savills monitors, approximately 14,500 PBSA new beds were delivered in 2022 - yet this was still not enough to meet the increase in student numbers.
On average across Europe, the public student housing market represents 63% of total PBSA beds, meaning the vast majority of existing stock is outdated and of relatively poor quality compared to private stock.
As we enter the fourth quarter of 2022, global events continue to impact the economic environment in Europe. With the rate of inflation forecast to keep rising for the remainder of the year, and after a period of economic slowdown over the last quarter, a weaker market landscape is expected until 2023.
In terms of GDP, the EU annual growth rate is 3.1% for 2022 year to date, with a lower growth rate of 0.1% forecast in 2023. The countries expected to perform the strongest next year are Ireland and Spain, with annual growth rates of 1.2% and 1% respectively. The biggest slowdown is expected to be in Germany, with a negative growth rate of -0.79%.
The Russian invasion of Ukraine has continued to drive up energy prices, with nearly half of euro-zone inflation directly linked to oil and gas. Countries such as Germany and the Netherlands have made efforts to tackle the impacts of the energy crisis, with German students receiving a one-time fee of €200 to support them with their energy bills. In the Netherlands, the government announced a price cap on electricity starting in January 2023, restricting the price of electricity to the average price from January 2022.
Despite this macro-economic backdrop, past data has shown that purpose-built student accommodation (PBSA) is countercyclical, with student numbers increasing in times of economic downturn, ensuring strong levels of demand for PBSA.
Nonetheless, rising inflation rates across Europe pose challenges for PBSA, as they do for all real estate sectors. Currently at 9.1% in the Euro Area, the cost of living has increased significantly. With PBSA rents generally moving in line with the overall residential market (mostly being index-linked), landlords will need to pay attention to how much they can raise rents before they become unaffordable for students. Finally, rising energy prices present a challenge for operators in countries where all-in-rents include utility bills.
Demographic Overview
Currently, the cities with the highest proportion of student-aged population include Copenhagen (21.8%), Manchester (18.4%), London (17.8%), Amsterdam (16.1%) and Munich (14.9%),Cologne (14.7%), Lyon (14.2%) and Dublin (14.1%) whilst the lowest share (below 10%) are in the Polish cities as well as Rome and Prague.
According to Oxford Economics, the student-aged population (15-19) in the major European cities is forecast to rise on average by 5.8% over the next five years (compared to a decline of 0.7% from 2017-2022), reversing the declining trend of the beginning of the century, with numbers forecast to steadily rise in most European cities (Fig 1). This trend is due to the rising European fertility rate at the beginning of the century, which lasted until 2010.
The positive trend will be seen in the majority of European cities, but mostly in Southern Europe as well as in Ireland. The cities expected to see the steepest five-year average annual growth are Prague (5.7%), Warsaw (3.5%), Wroclaw (3.4%), Krakow (3.0%), Berlin, (2.6%), Malmo (2.6%) and London (2.5%).
On the other hand, as Fig 2 shows, the student-aged population is expected to decline in some markets in Porto (-1.7%) and Utrecht (-0.4%).
Currently, the cities with the highest share of young population (15-19) includes Lille (6.8%), Lyon (6.7%), Manchester (4.9%), Dublin (6.2%), whilst the lowest share (below 4%) are in the Polish cities as well as Munich.
These figures represent predictions for the next five years, however for the population aged 15 years old this can be seen for 10 years. In the Polish cities, the student aged population will decline for the next 5 years, then it will start rising.
As domestic students are also increasingly mobile, moving forwards there will be an opportunities for PBSA expansion in a number of cities containing several university options.
The total number of students who enrolled in the last academic year (2021-2022) continued to increase in many European countries. On average, across the countries shown in Fig 3, student numbers increased by 1.0% compared to the previous academic year. Whilst this is lower than in the 2020-2021 academic year (which saw an increase of 3.4% YoY, with large numbers of students enrolling due to the pandemic), this year’s statistics fall back in line with average growth rates.
The rise in student numbers is uneven across Europe: France recorded the highest growth of student numbers in 2021-2022 (4.1% YoY), followed by the Czech Republic (1.7%) and The Netherlands (1.4%). By contrast, Sweden recorded an 11% YoY drop in the total number of students, although this can be attributed to the exceptional amount of students that enrolled during the previous academic year.
At a city level, large increases and decreases have been observed at both ends: Lille (29.3%), Lyon (24.6%) and Stockholm (12.0%) recorded steep rises in total student numbers, while Copenhagen (-16.7%), Malmo (-10.2%) and Porto (-3.7%) saw the largest declines.
Based on the positive demographic forecast for the student-aged population group and the slowing economy, which is expected to affect the labour market in 2023, we anticipate the overall student numbers will continue to grow in the next three years.
The 2021-2022 academic year saw international student numbers increase by an average of 3.7% annually across Europe, a strong performance compared to the previous academic year (2.5% YoY). As travel restrictions were lifted and studying abroad became more accessible to students again, cross-border student mobility resumed. International student numbers increased in nearly all countries shown in Fig 4, particularly in the Netherlands (11%) and Spain (7%). Denmark is the only exception, where international student numbers declined by 56% from the previous year, largely as a result of the government’s decision to significantly reduce the number of English-language taught courses, in a bid to lower the Danish State Education Support grant expenditure.
The increasing availability of English-taught courses and the wealth of cultural experiences on offer in Europe will continue to attract domestic (European) students. Europe has also become more affordable to some international students. As the Euro weakens against the US Dollar, studying in Europe will become more attractive for US students, as well as Hong Kong and Middle Eastern students, as their currencies are pegged to the USD.
As total student numbers increase, notably international students who often maintain higher budgets and are less familiar with local housing, we expect to see a rise in demand for purpose built student housing. Current annual average occupancy rates are high across Europe, ranging from 95% to 98%, unchanged from last year.
The average provision rate (total number of beds / total number of students) across European cities is currently at 12.5%, down from nearly 13% last year. Whilst approximately 14,500 PBSA beds were delivered in the various European cities we monitor, it was not enough to meet the increase in student numbers.
The cities which recorded the largest drops in provision rate between 2022 and 2021, are mainly located in France and the Netherlands: Lyon (-3.7 percentage points), Lille (-2.5), The Hague (-1.9), Amsterdam (-1.7) and Utrecht (-1.0).
In approximately one-third of the cities we monitor, the provision of PBSA beds increased, particularly in the case of Copenhagen (+4.3 percentage points to 25.2% ), Porto (+1.1 to 4.5%), Wrocław (+1.1 to 12.4%), Kraków (+1 to 14.3%) and Munich (+0.9 to 15.2%). In Copenhagen, Porto and Wroclaw, the higher provision rate mainly resulted from their lower number of students. Whereas Fig 5 indicates that in Krakow and Munich, new PBSA schemes have been delivered, providing the cities with 1,107 and 1,367 new beds respectively.
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It is important to add that the provision is calculated based on the total number of beds available in each market and that, on average across Europe, private student housing represents approximately 37% of the total PBSA offer. This means that the vast majority of existing stock is outdated and of poor quality.
Across the European cities that have released their 2022 data, prime PBSA rents have increased by 3.8% annually on average, with approximately half of the cities recording some rental growth, whilst rents remained stable in the other half. Polish cities have seen the most notable annual rental growth, with Warsaw (22.2%), Tricity (19.2%), Wroclaw (16%) and Poznan (13.0%) recording double-digit growth.
The reasons behind this strong growth are first, a surge of demand in the residential rental market. Interest rates in Poland are now at 6.75% hence people can no longer afford to buy apartments so they rent them. This strong demand was also fuelled by the large number of Ukrainian refugees who cross the Polish border following the war. Second, some new high-standard PBSA schemes have been delivered recently on the market pushing prime rents upwards.
As we anticipated in our previous report covering the 2020-21 academic year, Spanish cities have also seen high rental growth where the student housing provisioning rate was its lowest. The rental growth in Malaga (7.6%), Valencia (4.6%), Seville (4.0%) and Madrid (3.5%) all correlate to the comparatively low provision rates in these cities.
With several developments pushed back due to the pandemic, and the already high levels of occupancy and student numbers, we expect this supply and demand imbalance will continue to put upward pressure on prime PBSA rents in the coming years.
All-in-rents are the most common for student housing tenants, providing them with more certainty around their monthly outgoings. Such rents typically include water, electricity, heating and Wi-Fi, with some including additional amenities (Fig 6). These added amenities elevate student satisfaction levels and attract students to the PBSA model. Amenities generally include well-designed communal spaces that enable socialising within the building, 24-hour security, a laundry service and catering onsite, amongst other features: all added perks that support the attraction of PBSA housing.
According to Eurostat, energy inflation is the highest it has been since the first publication of the Harmonized Index of Consumer Prices (HICP) in 1997. Fig 7 shows how energy prices have risen sharply throughout 2022, with gas price inflation at a new record high of 74% across Europe. With Europe being previously highly dependent on Russia for gas, countries are now looking elsewhere, but that increased demand for gas is driving prices to record highs.
With rising utility bills weighing on operators’ costs, we may see utilities being put outside of rents and being made directly rechargeable to students. This is increasingly the case in the Netherlands and Germany, with 2023 likely to see more schemes in Ireland also doing the same.
The other option for landlords looking to offset these additional costs would be to increase rents. But they will need to approach rental increases with caution, as students are often in less of a position to absorb the increases. In some rare cases, we may even see governments stepping in to protect students from sharp rental increases.
On average across the major European university locations, PBSA rent costs equate to approximately 27% of an average household income, up from 23% last year. As many students partially or fully depend on their parent’s income to support their university studies, such significant increases in PBSA rents could present households with significant challenges.
A number of large PBSA transactions have taken place this year and investment volumes remain high in the sector. The total investment volume reached €11.7 billion in the first three quarters of 2022, a 130% increase on the same period in 2021 and a record high.
The UK has seen the largest portion of this investment, which was particularly high due to the Student Roost portfolio being sold to Greystar and GIC for €3.9 billion in Q2 2022, the second-largest deal on record. In 2021, both the UK and Germany dominated investment volumes.
Significant deals across the rest of Europe have also bolstered investment volumes. For example, Round Hill Capital closed on a €200 million Smart Studio acquisition earlier this year, the largest PBSA investment in Portugal in 2022, which will add a further 2,013 beds to the market.
In June, it was announced that Singaporean sovereign wealth group GIC and Dutch pension fund manager APG would take a majority stake in The Student Hotel, valuing the European student accommodation and hotel group at €2.1 billion. In May, Xior student housing signed a deal to acquire Basecamp’s portfolio for €939 million. This momentum has continued throughout the year, with Patrizia investing in both Barcelona and Turin in Q3, contributing to their acquisition of over €470 million.
The share of forward-funding deals as a percentage of total investment has been steadily rising over the past five years, accounting for 30% of total volume in 2022. Forward-funding deals are typical in countries with developing PBSA markets and limited available stock, for instance, Xior’s €32 million move into Warsaw which is set to deliver 500 PBSA beds by 2024. Poland is characterised by a structural undersupply of quality housing, so a forward-funding deal was necessary in order to achieve a successful entry into the market. These types of deals are however still at risk from build cost inflation and the rising cost of materials in the current market landscape, which may in the short term negatively affect investment activity. In fact, in 2021, the share of forward-funding deals was higher, at 36%, suggesting a slowdown in forward-funding investment activity.
PBSA investors are increasingly aware of the need to adhere to ESG standards and efforts have been made to improve the overall quality of PBSA in Europe. The €70 million scheme Patrizia has forward purchased in Turin is set to be built with the highest quality environmental credentials, designed to achieve LEED Gold certification by improving energy efficiency, lower carbon emissions, and enhancing environmental quality.
Earlier this year, The Student Hotel secured €145 million in ‘social and environmental impact’ funding from UniCredit for Rome and Florence with the loan agreement specifying terms for the achievement of a BREEAM “Very Good” rating. Such commitments to sustainability and positive social impacts will future-proof the sector and uphold the attractiveness of student housing for investors (as well as students, who are notably ESGconscious).
Prime PBSA yields currently sit at an average of 4.15% across Europe, ranging from 3.5% in Copenhagen to 6.0% in Seville. On average they moved in by 4bps during the last 12 months. Madrid (-75 bps), Dublin (-75 bps) and Barcelona (-65bps), Copenhagen (-25bps), Valencia and Malaga (both -20bps) have seen yields move in significantly since Q2 2021. Whilst at the other end of the spectrum, prime yields moved out in Gothenburg (40bps), Malmo (30bps), Paris region (30bps), The Hague (29bps) and Prague (25pbs). Over time, the spread between prime multifamily and PBSA has steadily been rising and currently sits at 95bps in 2022 from 100pbs last year.
The PBSA sector has continued to show that it is counter-cyclical and a good opportunity for investors to balance their portfolios in times of economic downturn. It represents a strong asset class and the positive sentiment in this sector demonstrates the confidence investors have in its resilience and ability to provide secure returns.
Marcus Roberts, Head of Europe - Savills Operational Capital Markets
PBSA is one of the only real estate sectors to have seen a positive increase in total investment volume in 2022.
The sector has continued to show that it is counter-cyclical, with large numbers of young people entering higher education during challenging macroeconomic periods (likely linked to their perceptions of a weakening job market and so employment prospects).
As a result, PBSA represents a good opportunity for investors to balance their portfolios, with strong demand feeding through to high occupancy levels and resilient income streams.
Nevertheless, challenges remain due to the current macro-economic landscape, and in particular developers and operators may face some issues from rising build costs and energy prices, threatening development viability and narrowing their operating margins.
This is arguably balanced out by the fact that, with a historic shortage of high-quality stock, a slowdown in new building completions may insulate the values of existing assets.
Ultimately, investment in the European PBSA sector is fuelled by strong fundamental drivers: growing student age populations in many markets, continued strong enrolment in higher education, demand for highly-amenitised, purpose built student accommodation and a lack of sufficient high quality stock.
As European cities continue to be globally competitive, innovative and better connected, demand amongst international students will also continue to grow.
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