Earlier this week I was delighted to attend the 2019 Student Housing Conference in London. Now in its 10th year, and with 600 delegates in attendance, the event provided a very clear indication of the continued interest in the purpose-built student accommodation (PBSA) sector.
This year’s conference once again brought together an array of experienced and thought-provoking speakers and panellists, who shared some fascinating insights. Our key takeaways included:
The PBSA market is growing globally – but mature markets like the UK are not finished yet
The well-documented risks of Brexit, lack of stock and hurdles brought by a hostile planning environment all present significant challenges for the mature UK PBSA market. These challenges, coupled with a “demographic dip” that will result in fewer university-age British students over the next three years, creates a difficult environment. Indeed, many institutions are already struggling and face the prospect of lowering entry requirements to preserve student numbers.
However, the number of international students coming into the UK continues to rise and this should result in net UK student numbers remaining flat for the next six years. The supply/demand curve also paints a promising picture, with key cities such as London, Liverpool, Birmingham and Manchester all remaining undersupplied – thus driving rental growth in these regions.
The feeling is that although there may be some choppy waters over the next three years until the demographic positively shifts, investors, developers and operators will not be writing off the UK market any time soon.
The small child in big clothes
What about emerging markets? Mainland Europe is seen as the key emerging market and is a region that keeps on giving. Activity over the last two years has established Germany and Spain as key markets and there is a sense that Italy, Portugal, France and the Nordics could be next.
The pace of growth in Europe is expected to be faster than the historic growth of more mature markets such as the UK; perhaps not surprising given that JLL research shows a supply/demand ratio of 14.5 million students to just 1.5m million beds.
One panellist described the continental European market as a child that had not yet grown into its clothes. A good analogy given its expected rapid growth coupled with the sense of this market growing into itself as investors and lenders become more comfortable with it over time.
Where next for pioneers?
The long-term future opportunity would appear to be China and Malaysia, where markets will be driven by sheer volume of demand. And for the true pioneer, India, Pakistan and Sub-Saharan Africa could be the next frontier. In India, enrolments have increased from 28.1 million in 2013 to 36.6 million in 2018, with growth driven by ongoing urbanisation.
Opportunity in these countries of course needs to be measured against the risk created by operational challenges and lack of higher educational infrastructure. Developers and operators will clearly need to spend time articulating the risk/reward potential to lenders and investors to get them on board.
Being mindful of the needs of Generation Z
The panellists agreed that understanding the needs of today’s students is key. Analysis shows that well-being needs to be high on the agenda for developers and operators, with a Red Brick Survey revealing that 80% of students felt that their accommodation had a direct impact on their well-being.
It’s therefore no surprise that the market is looking towards talented designers to ensure such considerations are taken into account when assets are built or redeveloped. The conference heard from space and brand design experts Naomi Cleaver and Siobhan Frost, who displayed some of their recent work placing student well-being at the heart of design. Such designs included input from students and psychologists with a view to creating spaces that encourage students to be the best version of themselves – not just academically but personally.
But how do these needs of the Generation Z student reconcile with the first generation of PBSA assets, many of which are over 20 years old and were built with number of beds in mind rather than the overall student experience? It would seem that light-touch cosmetic changes will not meet the demands of students and, for many assets, more radical redevelopment will be required. This will present developers and operators with a cost/benefit quandary. Interestingly, feedback from the Red Brick Survey suggests that student satisfaction is lowest at the mid-price range not at the lower price range, so some may choose not to make any changes but to focus on affordability. How such a strategy will sit with the associated university will be interesting given the Red Brick Survey finding that students unhappy with accommodation are 10 times more likely to have a negative perception of the institution.
What are we seeing at IQ-EQ?
IQ-EQ has a diverse range of clients within the PBSA sector, all with different strategic approaches. Some take a global view and have enjoyed significant success following forays into mainland Europe and Asia. This has required the need for a global structuring solution. As part of that structuring solution we have been able to partner with our clients and offer them access to our teams across the globe while maintaining a dedicated central point of contact.
Others are more UK-focused and those with scale in London are enjoying strong rental growth despite some of the challenges highlighted above.
In terms of capital, we continue to see investment from North America into the UK and Europe, but are also increasingly seeing Asian money flowing into the UK market. As an example, we have recently assisted with the structuring and ongoing administration for the acquisition of a large UK portfolio backed by a Singaporean corporate.
Though PBSA has enjoyed high investment volumes over the last five+ years, we are not witnessing any change in appetite for continuing investment. The ongoing activity we are seeing points towards a resilient sector backed by strong global demographics and favourable supply/demand factors. This, in our view, indicates that the impact of any broader financial downturn will be minimised and we can all look forward to continually busy times ahead.
IQ-EQ has the know how when it comes to PBSA. We provide administration and accounting support to PBSA structures with AUM of over £4.5bn and 40,000 beds located across the globe. We would like to get to know you and would welcome the chance to meet you and share some of our experiences. Find out more about our real estate services and get in touch.