Most property investors are now aware that purpose-built student accommodation (PBSA) is the UK’s top performing asset class.
Recent research from JLL showed institutional investors, such as pension funds and private equity firms are snapping up huge chunks of student real estate.
In fact, investment is expected to hit a record £3.3 billion in the first three first months of this year alone – 3.5 times more than during the same period last year.
But, what are the key drivers that have propelled the rise of PBSA and can private individual investors use them to maximise their own returns?
Strong and growing demand
Student enrolment figures in the UK are at record highs. Prior to the start of the current academic year, 659,030 students had submitted applications to enrol at UK universities – a 4% increase on 2013’s figures.
This demand has vast potential to grow further. In 2001, OECD data records around 2.1 million international students, now this figure is well over 5 million and the UK is one of the major beneficiaries of this increasingly mobile global student base.
Furthermore, the uncapping of enrolment numbers in September 2015 could push demand for PBSA higher – especially around the most popular and prestigious Russell Group universities.
PBSA came to prominence following the last economic downturn, as unlike other investments it is a non-cyclical asset. The potential for returns are not affected by the same external factors that drag on equities or even other property investments. The demand for PBSA is purely linked to the popularity of higher education and has been proven to rise regardless of the economic situation.
If anything, student numbers only increase during periods of economic slowdown – a quality that has made many people dub PBSA a recession-proof asset.
Traditional HMO student housing was always favoured by investors, as they could charge on a per room basis and increase their overall yield. However, the student preference of PBSA is pushing yields further still.
Modern students are now a savvy consumer base and recognise the value added by 24-hour security, high-speed internet access, cutting edge communal facilities and high-quality accommodation. They are willing to pay a premium of up to 70% to live in PBSA and consequently investors can obtain yields of around 7% annually.
Despite a student preference for PBSA, the vast majority of university cities in the UK have a critical undersupply. For instance, in cities such as York, Newcastle and Glasgow less than 10% of students live in PBSA.
Most students have to rely on unsuitable and rundown HMOs, meaning the introduction of new PBSA into an area is often welcomed with open arms – by students, universities and local councils.
The critical undersupply, coupled with the popularity of PBSA, has seen rental values increase at a healthy rate – up by an average 3% annually.
Unlike many traditional real estate or buy-to-let investments, student property provides a hands-off asset. Many providers, such as Select Property Group’s Vita Student brand, take care of letting, management and maintenance, while still enabling investors to purchase a property, receive the rental yields and sell it at any time.
For many people this is much more desirable than being a full-time landlord and also makes it possible for overseas investors to purchase UK real estate in confidence. Even in a two-year period from 2011 to 2013, the amount of overseas investment in the sector increased from 23% to 52% of total investment.