Rising demand in university places raises demand for student accomodation

With the news in August that A-level pass rates were at their highest for the 27th year in a row, it is perhaps unsurprising that the number of young adults seeking further education at degree level has also increased.  The Guardian recently reported that “this year, demand for (university) places has exceeded supply, and up to 50,000 applicants with the qualifications for higher education have found themselves without a place.”

This is a view corroborated by the research team at international real estate adviser, Savills, who report that the number of undergraduate students accepted onto courses this year is at an all time high with provisional data from UCAS showing that student acceptances have risen by 10% whilst overseas demand has also grown by 6%.  In addition, Savills expects to see a surge in demand for postgraduate courses as the weakening jobs market may motivate individuals to re-train or stay for longer in higher education.

With demand high, it naturally follows, that the demand for student accommodation is also on the increase, providing an alternative commercially driven income stream with annual rent reviews and rental growth and the ‘granular’ nature of the income, for many investors.

“High demand, low supply, rising rents and high occupancy rates make student accommodation an investment vehicle of choice during uncertain economic times, and suggest that the sector will remain relatively low risk for the foreseeable future”, says Jacqui Daly, director of Savills Research.

She continues:  “An underlying supply/demand imbalance points to a robust outlook for the sector, while the fundamental strengths of the business model mean that capital values have not fallen to the same degree as other commercial or residential real estate.”

As a result, the market is increasingly seeing potential new entrants to the sector including annuity funds, international money and equity rich private individuals and consortiums. These parties are typically looking for a variety of investment characteristics to include ‘safe havens for cash’, stable and ‘vanilla’ income producing assets and possibly the opportunity to take advantage of current currency positions.

However, the current economic climate – in particular the withdrawal of developer debt-funding – will limit the scope for investors to grow their interests.  As a result, the past 12 months have seen a consolidation of stock, with operator activity focused primarily on buying and selling existing stock from universities and private operators, as well as refurbishing old university stock, rather than organic growth through new developments.

As a result, and in the face of rising student rolls, demand will continue to rise.

Marcus Roberts, Head of Student Housing at Savills, comments:  “Our forecast of ten years ago that student accommodation would be a counter-cyclical investment is proving to be accurate.  The scope for individual investors to access this market is rather limited against a backdrop of constrained credit availability, particularly as lenders have tended very recently to tarnish student accommodation with the same brush as buy-to-let investments, which have proved to be much higher risk in the market downturn.  There are, however, investment vehicles (for example, retail funds) which allow individual investors to invest indirectly in the sector.

“As credit becomes more available, however, we would expect to see investors exploiting the sector’s potential.  One such model would be the creation of clusters of student accommodation, which given rising demand and a frustrated supply channel, would offer a relatively secure investment model for the foreseeable future.

“At the institutional level the counter cyclical dynamics of the sector are boosting investor interest.  After risk adjustment, this is a sector that is still showing rental growth, clearly setting it aside from other commercial investment vehicles.  The model is based on many individual students regularly paying small amounts of rent, meaning that the risks of large scale default or voids are extremely negligible, with or without a university guarantee.”

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