Brexit – What does this mean for the development of Purpose-Built Student Accommodation?
In June 2016, the UK opted in favour of a ‘Brexit’, signalling the start of a bumpy divorce proceeding with the European Union in what is arguably the biggest geopolitical event in a generation.
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In June 2016, the UK opted in favour of a ‘Brexit’, signalling the start of a bumpy divorce proceeding with the European Union in what is arguably the biggest geopolitical event in a generation. The results appear to contrast free market theory which advocate cross-border integration in financial markets and factors of production as a means to achieve a perfect market. The uncertainties following this decision are likely to dominate the UK’s political and economic environment in the short to medium term. The gravity of the impact will vary across different sectors however I believe the development of purpose-built student accommodation (PBSA) will remain robust for the foreseeable future.
Universities
Universities across the UK have voiced their disappointment (rightly so) following the EU referendum results which favoured a ‘Brexit’. Some 125,000 students currently undertaking higher education in the UK are classified as EU students and are said to contribute £3.7bn to the UK economy according to Universities UK. The ‘Brexit’ may lead to a change to the fee structure for EU students, whom have currently been enjoying tuition fee parity with UK students. The extent to which this occurs however will depend on the terms of the new agreement, which appears to be some years away since Article 50 has yet to be triggered. In the meantime, as the pound falters against other major currencies, EU students will be served by extra buying power, which means that tuition fees will be relatively cheaper for now.
It is also important, when discussing longer term, not to overstate the representation of EU students in the grand scheme of things, with only 5% of all students coming from the EU, while 81% are from the UK and 14% are classified non-EU students (Figure 1).
As long as UK universities, particularly higher ranking institutions remain a hotbed for students seeking to gain a global advantage in their respective career paths, applications from EU students are likely to remain strong despite the UK’s decision to ‘Brexit’. Instead, much of the emphasis should be placed on the impact on lower ranking universities with weak reputations, which I expect will face the greatest challenge to attract EU students.
So what does this mean for the development of purpose built student accommodation?
The development time-lag which exists in property markets will ensure that most of the developments already under way will see through to its completion. However, there is the possibility that some developers could delay planned PBSA’s in light of the uncertainty which is likely to remain until the terms of our new-found relationship are made clear.
Yet, with the UK economy forecast to see weakened growth in the near to medium term according to the latest Inflation Report (August 2016), investors will look to assets which yield consistent returns. This will place the spotlight back on the PBSA development market.
Why?
The market is already characterised by an undersupply of PBSA and so while the process of bringing 125,000 EU students p.a to study in the UK may not be made any easier, developers will recognise the significant supply gap as an opportunity to tap into.
Recent evidence from the Higher Education Statistics Agency (HESA) suggests that student numbers in fact rise during a subdued economic environment. Such resilience to changes in the economic cycle bolsters the case for further capacity over the coming years.
In periods of uncertainty, investing in ‘safe assets’ becomes attractive. A fully functional PBSA provides the characteristics which enable investors to benefit from relatively strong income returns and be able to hedge against other riskier assets.
Added with the fact that the value of sterling is forecast to remain relatively weak in the short term, overseas investors are likely to view the UK as an attractive destination for investment. The combination of factors stated above all serves to boost the development of PBSA in the UK.
It remains to be seen whether development activity will be skewed to locations in close proximity to higher ranking universities at the detriment of lower ranking institutions. However, the ‘Brexit’ result does tell us that the changing wider economic environment could serve to invite new entrants into the UK’s student property sector, driven by the foreign exchange market. Its cash generating characteristics and its reputation as a safe asset will be its key attraction and the reason why despite a volatile market, PBSA will continue to have a growing presence in the UK’s built environment.