An asset class graduates with distinction

Less than two decades ago nearly 100% of all purpose-built student accommodation was university owned and operated. Students lived in university halls of residence or in terraced housing. There was no commercial alternative. By 2014 the combined value of private-sector PBSA stock and university halls was more than £30bn. Since then more than 80,000 student bedrooms have been delivered, rents have grown and yields have sharpened. Today the sector is worth more than £45bn, a figure projected to reach £50bn by 2020. We may have entered the century with no private stock, but by the end of 2017 the value of the private sector PBSA stock will exceed university stock for the first time. It will be a coming-of-age moment for the asset class. The main impetus behind PBSA development is the private sector. Much of that development has produced premium product for international students. The proportion of private sector bedrooms under construction is increasing – 85% of all schemes currently being built are by the private sector. This leaves universities free to focus their financial strength on providing higher education, rather than building student accommodation. But if universities want to encourage the development of a mid-range product, affordable to both domestic and international students, they will have to engage with private developers, which will snap up the opportunity to work with universities to deliver more affordable, quality accommodation. This year is also remarkable because it marks the first time the volume of institutional investment into PBSA exceeded that of private equity. Institutional investors, specifically pension funds and REITs, which were practically absent from the market only five years ago, now account for more than 50% of all activity. Investment into PBSA has been dominated by overseas capital, which accounted for some 70% of all transactions during the past 12 months. Investors from the US, Canada, Singapore and the Middle East have all made deals, with 60% of all transactions over the period made within portfolios. And although there is a limited volume of portfolios yet to transact, we still expect 2017 to be dominated by both operational portfolio transactions and development portfolio transactions. The outlook for the student sector is bright. Structural undersupply remains and PBSA is one of the few asset classes that have offered rental growth every year since the economic downturn. In an uncertain world, investors are attracted to a residential asset class underpinned by the performance of the UK’s world-class higher education sector. James Pullan is head of student property at Knight Frank