On Purpose Built Student Accommodation

This article is about the ongoing growth of purpose-built student accommodation (PBSA).

Purpose Built Student Accommodation (PBSA) and Institutional Investment – the Background

Some time ago, probably in the late 80s, there was probably a meeting somewhere at Westminster or one of those City clubs where some heads of big pensions funds were moaning to government ministers about the strong arming by government to buy government bonds.

Of course, no one gets to be a CEO and especially a chairman of one of our big pension funds, unless one is the “right sort” and in the right clubs and ahem, societies. The public square is not the only square you would need to be aware of.

All the same, the returns were now so bad, following the gradual expansion of government debt that the shareholders were beginning to moan very loudly indeed. After all, to meet pensions liabilities, you only needed to buy and hold a certain amount of government bonds anyway.

And so, someone at this meeting will have come up with the idea of investing in the private rented sector. The returns are and were better and more reliable than gilts (government bonds). And the current providers – the many private landlords – were not a coherent competitor who would complain loudly. For a start, barely 5% of them even belonged to a landlord association. The competitor had no voice.

Of course, the pension funds knew they would struggle to compete with efficient “Mom and Pop” landlords, many of whom would also be doing well, in part by paying their small suppliers free of VAT, (legitimately because many of their small suppliers choose to operate under the turnover for VAT registration threshold). “No problem”, said the Minister, “We will give you some incentives to invest”. And they did.

Later, when people had taken to swapping duff annuities with their diminishing returns, (itself a consequence of easy money printing and low interest rates), for pension pots, there became even less demand for matching liabilities, so even less demand for government bonds too.

And still, the institutional investors still found it hard to compete with small private landlords – hence a harsher taxation regime was bought in for those landlords, especially the army of un-incorporated ones. Now that really did even things up.

Purpose Built Student Accommodation

Now a lot of this investment of the institutional players has been in purpose-built student accommodation (PBSA) rather than other private rent markets. The returns from students are better, so is the client.

Unlike a lot of the non-student stock, the students are only there for a year or two. With students, you won’t need to worry that your previously shiny new block starts, over time, to be increasingly filled with housing benefit types who may not pay the rent and who may have to be evicted.

And the student market is growing too.

Data from the Office for National Statistics shows that there will be around 200,000 more 18-year-olds in a decade from now. Over the last decade, the percentage of 18-year-olds in England who applied to go to university increased from around 32% to 43%. UCAS says the number of English applicants is up 55,000 in the last two years alone, which is remarkable given the awful experience many will have endured under Convid rules.

There remains also strong demand from non-EU students, this making up for the fall off in EU applicants, post-Brexit.

Certainly, the likes of Unite Students, the biggest student accommodation provider, look well placed, last year reporting an occupancy rate of a staggering 94%. They also have a big development pipeline too and have stated they are keen to go after the high-end markets.

Interestingly, they are also pursuing a strategy of ever bigger developments and are selling off some of their smaller, earlier developments to achieve this – pursuing ever larger economies of scale to give higher profits.

Many of their new build blocks are very much at the high end – with rents of up to £500 per week per student not uncommon among the new stuff in central London, over in trendy Hoxton way.

No doubt, they will be hoping for a greater return of the Chinese students than we have seen thus far – as many of them are seemingly among the most able to pay the higher rents.

Unite is also focussing more on the towns where the Russell Group of top universities are – as it is where demand is highest and increasing fastest and where the ability to pay premium rents seems to match up too.

Another company playing in the high end of student accommodation is Greystar, which, working with a foreign pension fund, has invested in their very up market Chapter brand. They have several developments across London and hope to encourage students to hang out with other wealthy students in other colleges via networks they will create for them.

Sounds ghastly to me. When I was a student in the 1980s, I would have run a mile from that! How times change, a bit like Joni and Neil!

I always advise private landlords who invest in university towns, (even those not going after student lets), to keep an eye on what the likes of Unite have planned. This is especially true for the Russell Group universities outside London. The likes of Unite can very quickly gobble up your market, even if their price offering is much more premium than yours.

So be careful.

But there should still be a market for the private landlord terraced house offering the “real student experience” of a filthy toilet, cooker and bath as there will be a limited number of students who want to live in a high rise antiseptic flat. (Tip – get a cleaner in!). But keep an eye out for those ever-growing PBSA developments, especially around the Russell Group universities.

Note: We suggest you try to invest in houses built post 1970, with cavity walls, where you will at least have a chance of getting to EPC grade C.


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