Question time: Scale, quality and brand help underpin rents, says Unite

Rents for purpose-built student accommodation (PBSA) increased by 2.36% for the 2019/20 academic year, up from 2.26% in 2018/19.

While the macro picture shows steady rental growth, there are variations in performance dependant on both location and property type, highlighting the importance for investors, funders and developers of adopting a localised approach when examining individual markets.

Knight Frank: What is driving rental outperformance for certain bed spaces and operating types?

Nick Hayes: Affordability and value are key factors underpinning rents as the research shows. Whilst student numbers have remained flat across the UK at city level, the position is dynamic with some markets growing and others contracting. There are also markets where pipeline has not kept up with student growth adding further pressure on rents – London is a prime example of this. 

KF: To what extent do you think that affordability will weigh on future pricing? 

NH: Affordability is clearly a critical consideration for students and, as such, it is something we are acutely aware of when setting prices. However, our research consistently shows that students increasingly recognise the importance good accommodation to their overall university experience. We therefore focus not just on outright cost but on providing real value in the form of a living experience that reflects what matters most to them. The influence of affordability, moreover, tends to vary depending on location, and markets need to be assessed on their individual drivers and merits. For example, in markets which are home to a large number of international students affordability is likely to be less of an issue given the focus such students place on living in a high quality property in a prime location. My sense, though, is that widening participation has led to more applicants from lower socio-economic backgrounds and, as a result, there is – and will continue to be - a greater weight of students that want access to rooms that are more affordable.

KF: Where do you see the key growth opportunities?

NH: We believe in the underlying fundamentals of the whole UK market and the HE sector generally. However, there will be winners and losers. Cities which are home to higher quality universities, for example, will continue to grow student numbers, whilst lower tier institutions will increasingly struggle to attract new students. Middle tier universities will do well if they can get their offer and recruitment right and this will lead to some interesting opportunities from an accommodation perspective. We also see an opportunity in growing demand among returners and postgraduates who increasingly understand the value of PBSA as an opportunity

KF: Should investors and developers of PBSA be making assessments of individual universities and sub-markets within cities?

NH: This has been a key focus for Unite. We have purposefully exited some markets because we didn’t feel that demand was as resilient as others. Where this has happened, we have recycled that capital into what we perceive to be stronger markets. It’s likely that we will continue to see a growing divergence in the UK between top tier university cities and the rest of the market - something Knight Frank has highlighted in previous research - and it is important to be mindful of this. However, it is also important to take a long-term view when assessing individual cities. You can look at the current data and conclude that a certain market is struggling, - but actually in four or five years’ time, will it recover because there isn’t going to be much of the pipeline built out? We’ve seen it before - Leeds, which is at the top of the rental growth ranking for this year, has had similar problems in the past, as has Manchester. Both are now growth markets.

KF: How do you think about delivering value and what impact does it have on pricing? 

NH: By understanding what really matters to students and our university partners. We have a high proportion of rooms in nominations agreements with universities – around 60% of our portfolio - and this along with record satisfaction levels among both universities and students reflect how effective we are at delivering value for money. We have also actively reduced our exposure to studio flats which account for around 8% of our portfolio. The way we market our rooms, the way we sell them, and the way we manage income is becoming more sophisticated. We are consciously trying to reduce the cost burden on students within the peak term time period. However, there is also something to be said for offering 51 week tenancies and giving students the ability to live somewhere in the summer, perhaps so that they can commit to a job in their university city, should they wish to do so. In time, we plan to move away from looking at rental growth as a measure of performance and to focus more on optimising our earnings and income generation in other ways. That may be through a combination of increasing summer lets and short-term lets, alongside efficiencies as our portfolio grows or putting more focus on income from our commercial estate. We want to pull all of the levers we can to provide the strongest value for money, including through dynamic pricing. For us, this is about offering students a discount, by providing a saving if they sign up early. A lower price point at the start of the cycle can also act a gauge of demand for a building which allows us to better understand what the market price should be by the end of the letting cycle.

KF: How does brand recognition factor when setting pricing in different markets? 

NH: When I think about brand, I think about our commitment to students, the service we provide and the quality of accommodation. It is about settling students in when they make their life changing move to University, being there when they need us and being safe and secure. Part of this is about investing in the way we engage with students, parents and in understanding what our brand means to them. Our relationships with Universities remain critical to us and our reputation determines their desire to partner with us.