How will purpose-built student accommodation markets react to Covid-19?

At the end of last year our Student Accommodation Survey noted that politics presented the biggest and most immediate challenge for the purpose-built student accommodation (PBSA) market, with question marks over fees for international students following the UK’s departure from the EU just one area of concern.

It is now clear that the Covid-19 pandemic has moved those goal posts entirely, with the focus having shifted to the potential disruption to the summer term and next academic cycle.

In the short-term PBSA operators are concerned about income - many have rightly offered existing tenants refunds and discounts on their accommodation - but there are also new costs to factor in, including the liabilities many may have for Council Tax payable on vacant rooms.

Meanwhile, universities themselves face an anxious wait to understand the impact travel restrictions may have on the number of international students starting their studies this year, as well as the competition they may face for a finite and reduced number of UK students. This could compound the already stark differences in demand for places across different groups and tiers of universities, with universities close to the top of rankings tables likely to benefit.

However, despite these short-term impacts, there are positives to draw on from the long-term resilience of UK Higher Education and the accommodation that supports it.

The relationship between UK economic performance and the desire to study is clear, for example, with student numbers often increasing during times of uncertainty as students look to ‘up-skill’. Between 2007 and 2010, for example, when UK economic growth contracted by 4.5%, applications to UK universities jumped by 30%.

Even though the downturn is expected to be short-lived this time by comparison, we would expect to see a similar trend given the likelihood of an increasingly competitive jobs market as the recovery takes hold.

It is also worth noting that the proportion of young people across the UK that are applying for university has been steadily increasing and participation is currently at a record high.

A record-breaking 39% of all 18 year olds in the UK submitted an application to start studying at UK universities in September 2019, according to data from UCAS. Increasing participation rates are just one of a host of factors underpinning the student accommodation market.

Record entry rates alongside a projected increase in the 18-year old age cohort over the next ten years will bring an estimated additional 135,000 home students. The question will be whether universities are able to expand to accommodate the increase.

The investment case for student property also remains compelling, with evidence that total returns for student property have held up against previous drops in real estate activity.

Rental growth within the sector, for example, has averaged 4.5% over the last ten years compared to average RPI inflation of 2.8% and rental growth in the office and industrial sectors of 1.8% and 1.4% respectively (as measured by MSCI).

Merelina Sykes, Joint Head of Student Property at Knight Frank, notes: “There is burgeoning demand for income-producing residential assets in the UK which has risen sharply over the past few years due to a stronger recognition of undersupply within the market and the underlying demographics.

“Investors will continue to look to PBSA for its secure, long-term income despite any short-term shocks from the current ‘lock down’ situation. Throughout the global financial crisis PBSA has offered investors strong rental growth and overall returns in excess of more traditional asset classes. As we have seen previously, in times of heightened uncertainty, people look to higher education to drive future employment prospects and this means an increase in student numbers.”