Co-authored by Savills and The Class Foundation
Over €12bn to be invested in purpose-built student accommodation (PBSA) over the next two to five years, led by Spain, Italy, Germany, France, and Portugal
The European PBSA Investment Barometer unveils the current landscape of the PBSA industry and provides a forward-looking perspective, arming decision-makers with the knowledge they need to navigate this dynamic market successfully. By harnessing the data, trends and analysis in the report, investors and other stakeholders can make well-informed decisions, capitalising on opportunities in this thriving sector.
The PBSA sector in Europe has undergone remarkable growth in recent years, driven by changing student demographics and a heightened focus on quality living experiences. Investors play a pivotal role in shaping the future of this dynamic industry. The report helps us gain a comprehensive understanding of the current state of the PBSA market and its near-future trajectory.
Europe’s PBSA landscape
Across Europe, Savills estimates that there are currently c.1.94m PBSA beds, including both public and private provision. Previous analysis from Savills 2022 European PBSA Spotlight found that, on average, private provision accounted for only 37% of PBSA beds.
The respondents included eleven investors and operators who have a total of 122,500 PBSA beds with a combined value of €17.8bn. We estimate that it represents close to a fifth of all private PBSA beds across Europe. The five countries where most respondents have exposure are Spain, Germany, the UK, Portugal and Austria.
How the landscape will change over the next two to five years
Respondents to the survey expect to see significant growth in the number of private beds being added to the European market, with a further 93.6k expected over the next few years. This equates to a further investment of €12.3bn in the delivery of new supply. Savills European Living Investor Survey (ELI Survey) earlier this year provides further evidence of investors' appetite for the sector. It was the second most cited ‘Living’ sector that investors wanted to expand in, with 65% of investors looking to target the sector. Only multifamily was higher (73%). The Savills survey also showed that over half of investors who want to expand in PBSA are looking to deploy over €100m over the next three years.
In terms of location, respondents expect to see the greatest investment in Spain, Italy, Germany, France and Portugal. Spain, Italy and Portugal are all markets where there is limited provision of PBSA currently (less than 10%), highlighting the significant growth potential of these markets.
Where are investors targeting?
For all respondents, it is significant to see their focus on primary cities, despite higher challenges around land acquisitions. Around 36% of respondents are also building in secondary cities, and 11% in tertiary. This is borne out when looking at investment activity over the past year. In many markets across Europe, there has been an increase in the level of capital being deployed outside of primary cities, for example, over half of capital invested in Spain during H1 2023 has been outside of Madrid and Barcelona, according to data from Savills.
The Class believes that this trend of shifting to secondary and tertiary cities stems from a lack of suitable land to build on and/or assets to acquire in primary cities, along with a boom in higher education in smaller cities across Europe. Alongside the growing confidence of operators in the level of demand across markets as they mature, according to Savills.
What will impact investors' businesses?
Unsurprisingly, given the current economic backdrop, investors are most concerned about what happens to economic growth and inflation in the near term and what the knock-on effect is for interest rates.
Inflation, far from being transitory, has remained higher and for longer than had previously been forecast. This has resulted in the European Central Bank (ECB) raising the interest rate on their deposit facility to 4.0%, pushing up the cost of borrowing for investors.
There are now signs that we could be at peak rates, with the ECB maintaining rates at their latest meeting in October, pointing to falling inflation and slowing economic growth. However, it remains to be seen how long these higher rates are in place.
What are investors most concerned about?
Looking beyond the immediate economic situation, the ESG agenda is next on the minds of investors. On the social side, it is concerns around housing affordability that are front and centre. This is unsurprising given the significant rental growth that has been seen across the continent, with rents for both PBSA and general residential rising by double digits in some markets according to data from BONARD and HousingAnywhere. This raises the spectre of increased regulation, which is also flagged as a concern for investors.
On the environmental side, governments across Europe are starting to tighten regulations around sustainability and decarbonisation, which will put pressure on existing assets and is feeding through to investors‘ concerns. The focus on environmental aspects mirrors the results from Savills ELI Survey, where 77% and 63% of investors rated ‘energy and resource efficiency’ and ‘net zero carbon’ as being very relevant to their investments in the wider Living sector.
What are investors least concerned about?
Interestingly investors are not too concerned about management or the workforce and digital transformation impacting their businesses. This could reflect the fact that investors have been working on addressing these potential challenges in recent years, especially having dealt with them through Covid-19. And, as a result, don’t see them as being a significant issue over the next few years.
The availability and source of capital
When asked about availability of capital, respondents believe that equity and debt for development would be of the biggest concern. However, there is optimism around equity and debt for financing new investments and refinancing stabilised assets. This likely reflects a more conservative approach from investors and lenders with the current macroeconomic backdrop, and cost challenges facing the construction sector. As a result, we could see a slowdown in new development, further exacerbating the supply challenges facing the sector.
However, the optimism around finance for newly completed developments and refinancing stabilised assets highlights the strong appetite for the sector – mirrored by the Savills ELI Survey. This also points to a route for existing operators to free up equity that can be used to continue development, albeit fewer schemes at the same time due to the lower availability of other finance.
How do you anticipate the potential shift in the availability of senior debt for your company between now and the next two to five years?
The majority of investors expect to see an increase in the availability of senior debt over the next two to five years. The strongest growth is expected to be for value-added real estate. In Savills ELI survey just under a third (31%) of respondents were following a value-add strategy for their living investments. This indicates that we could see growth in these strategies being adopted in the next few years if there is greater financing available for them.
In contrast, there was a slightly less rosy picture for the availability of debt for new development and new financing – reinforcing the previous point on challenges ahead for the growth of new development alongside the importance of continuing to strengthen existing financing relationships.
Changes in the source of capital
Respondents also anticipate an influx of global capital into European markets over the next two to five years. Expectations are that most of the growth will come from North America, Asia-Pacific and then the Middle East.
This continues the trend that has been seen over recent years. Analysis of the latest data from RCA shows that across Europe cross-border capital has, on average, accounted for around two-thirds of annual investment over the past five years. With North American and Asian – in particular Singaporean – capital being the most active.
Meeting ESG credentials: Dealing with outdated ESG stock
When asked how they plan to deal with current stock that doesn’t meet ESG standards, close to two-thirds (62%) of the respondents plan on refurbishing, while 23% plan on selling the stock. The aim to refurbish points towards the environmentally conscious investment sector who want to future-proof their assets and are in for the long run.
This is a laudable ambition and certainly points towards a greater consideration of embodied carbon and the positive ESG outcomes that can be had from refurbishment. However, it isn’t without its challenges.
But it could also point towards a recognition that investors won’t be able to maintain/grow scale if they were to rely upon buying only new stock and selling off non-ESG-compliant beds. Especially if new development slows in the near and medium term as finance is more constrained and the availability of land remains a challenge.
The land challenge
Unsurprisingly, a sizeable minority of respondents (45%) reported facing challenges in acquiring land on both the brown and green belts. This highlights the broad challenge facing all living sectors across Europe in securing land for new development, especially in and around major towns.
When considering where to develop, respondents reported that site connectivity is by far the most important factor. The Class champions strong collaboration with city leaders, and urban planners to ensure that suitably well-connected sites are brought forward for new PBSA schemes.
While location remains the most important factor when looking to bring forward development, it is very interesting to see that environmental and sustainability factors are the second most common factor for investors. This outlook will support the case for brownfield development, where it is likely to be easier to make the case for environmental improvements.
However, investors remain keenly aware of costs and complexity. This is understandable when residential build costs across Europe have been rising by between 8% and 15% per annum over the past few years, according to Eurostat. These two factors could hamper innovation in the delivery of new schemes if costs become prohibitive.
As highlighted earlier, the strong levels of rental growth seen across Europe for PBSA are pushing the question of affordability further up the agenda.
When asked about the introduction of affordability regulations, most investors didn’t think they would be beneficial for the sector. They claim that regulations disincentivise innovation and make it difficult to meet targeted returns, thereby decreasing investor and developer interest.
This somewhat contrasts with the results from Savills ELI Survey, where only 40% of investors consider regulatory risks to be a major barrier to investment in the Living sectors. With 49% saying it was a small barrier and 11% that it wasn’t a barrier at all. This could reflect the experience of investors in more regulated multifamily/resident sector and so are therefore more used to regulation. Furthermore, in the residential sector, many of the largest investment markets in Europe are those that also have regulation – as it can, when done right, provide investors certainty on return and reduce risk.
Conclusion
In summary, the European PBSA Investment Barometer Report 2023 reveals a thriving PBSA sector in Europe, driven by evolving student demographics and a commitment to enhancing living experiences. Investors, including institutional, funds, and real estate operators, play a pivotal role in shaping this dynamic industry.
Key findings include a combined €17.8bn in PBSA assets among survey participants, close to a fifth of operational private PBSA beds, with the European market poised to see an additional 93,600 beds and €12.3bn in investment. Notably, Spain, Italy, and Portugal present untapped growth potential in the PBSA market.
Investors' primary concerns revolve around economic growth, interest rates, and inflation, along with an increasing focus on environmental sustainability. The report also indicates potential financing challenges for new developments, necessitating the strengthening of existing relationships. Addressing ESG compliance, investors favour refurbishment over selling non-compliant assets, but challenges persist.
In essence, the PBSA sector in Europe stands at a transformative crossroads, where investors wield the power to redefine the very landscape of PBSA. Their strategic decisions, allocation of resources, and visionary outlook will not only drive the sector's growth but also determine the quality of living experiences for the students of tomorrow. With an ever-evolving market and a dynamic mix of players, investors must navigate economic challenges, respond to shifting student demographics, and champion environmental sustainability. Their choices, particularly regarding new developments, financing, and adherence to ESG principles, will ripple across the sector.
The report underscores that as investors assess opportunities, collaborate with educational institutions, and engage with city officials, they're not just making business decisions; they're influencing the educational journeys of countless students. Their actions can bridge the affordability gap, drive innovation, and ensure that the PBSA sector remains a cornerstone of not only real estate investment but also of higher education itself.
About The Class Foundation:
The Class Foundation, established in 2011, operates as a partner-based non-profit organisation with the goal of advancing the professionalism and understanding of student housing across Europe. Serving as the largest European Student Living ecosystem, its mission centres on being the foremost think tank dedicated to the realm of student housing and experience. With research, events, collaborations and awards, The Class Foundation fosters an extensive international network comprising more than 100 complementary partners creating homes for more than 3 million students. By facilitating connections among operators, investors, policymakers, universities, service providers and student organisations, we provide a community and platform for thought leaders to exchange high-quality information and best practices.