Purpose-Built Student Accommodation (PBSA)
The PBSA sector continues to grapple with a significant supply and demand imbalance.
With student numbers in the UK reaching record highs, the demand for accommodation is exceptionally strong. However, the available supply of beds is not meeting this demand, largely due to planning constraints and viability challenges, leading to promising rental growth prospects for the sector.
Important Highlights
The consistently high student population and broader demographic trends are expected to sustain strong demand for PBSA in the coming year. Although demand from European Union (EU) students has decreased, it is being counterbalanced by rising demand from international students outside the EU. Lower A-level grades and stricter entry requirements are pushing more students towards lower and medium tariff universities, thereby increasing the demand for PBSA in these areas.
The supply of new PBSA remains constrained by several factors, including stringent planning requirements and the need to upgrade existing stock. This has exacerbated the current shortfall of 580,000 beds. Additionally, the availability of Houses for Multiple Occupation (HMO), which many students rely on for accommodation, is limited. Investment activity in the sector has been strong and is expected to improve further in 2024, driven by robust operational metrics and a strong return outlook.
Increased Demand at Medium and Lower Tariff Universities
With the UK student population at its highest level ever, PBSA demand is poised to remain robust in 2024. Broader demographic trends also support this demand. According to the Office for National Statistics, the population of 18-year-olds in England is projected to grow by 5%, or 30,000 individuals, in 2024. University place demand is also expected to be strong, with UCAS data indicating that acceptances, although slightly down from the previous year, are still 24% higher than in 2019.
The decline in EU students will be offset by increasing demand from non-EU international students. UCAS data shows a 2% rise in applications from international students for the 2023/24 academic year, driven entirely by a 4% year-on-year increase in non-EU student applications, totaling 116,000. This trend will likely lead to continued growth in university participation rates and robust demand for PBSA.
There has been a noticeable shift towards medium and lower tariff universities, driven by falling A-level grades and some universities tightening entry requirements due to over-recruitment during the pandemic. CBRE anticipates this trend will persist over the next few years, increasing demand for PBSA beds in regions with these universities.
High Occupancy and Strong Return Prospects to Drive Investment
Challenges in the private rented sector will also boost demand for PBSA in 2024. CBRE’s research indicates that approximately 400,000 private rented homes have been sold in recent years, contributing to a shortage of Houses for Multiple Occupation (HMO), a key accommodation option for many students. The shortage of new PBSA development will continue into 2024, as completions in 2023 were at an all-time low, exacerbating the estimated shortfall of 580,000 beds nationally.
Factors such as high construction costs, stringent planning requirements, higher debt costs, and changing building regulations will continue to impede new development throughout 2024. New supply will likely be concentrated in a few towns and cities with strong occupational markets and less challenging viability conditions. Additionally, some older university stock will require extensive modernization to meet student expectations and remain competitive. This presents an opportunity to reposition legacy PBSA in 2024, especially where new builds are not feasible.
Despite the challenging environment, PBSA investment remained strong in 2023. As debt markets stabilize, inflation decreases, and the economy recovers, PBSA investment is expected to improve further in 2024. Strong operational metrics and income growth prospects will also bolster investment. Occupancy for the 2023/24 academic year is at a record high, with many schemes at least 98% booked by Spring 2023. Similar occupancy levels are anticipated next year, supporting strong rent growth projections. Unite predicts rent growth of over 5% for the 2024/25 letting cycle.
Investors are expected to focus on specific opportunities next year. For instance, managing highly reversionary assets offers the potential for substantial returns, driving investment in markets with robust fundamentals.