In the last 6 months there has been a great deal of media attention surrounding the impact of COVID-19 on universities. With campuses closed for the remainder of the 2019/20 academic year, travel restrictions imposed, the A-Level results debacle and speculation as to the future role of online learning for the 2020/21 academic year, the UK Higher Education (HE) sector has undergone some intense scrutiny. In July the Institute for Fiscal Studies (IFS) speculated the consequences of COVID-19 could result in 13 universities facing insolvency. The knock on effect of such scrutiny has seen questions raised over the future viability of Purpose Built Student Accommodation (PBSA) as a good investment; something unthinkable to many at the turn of the year. And yet, as I will explain, despite the tumultuous speculation, as the new academic year kicks off in earnest, PBSA remains top of the class as an investment and this is backed up by the data.
Student numbers have grown
One of the biggest areas of speculation has been whether students will stay away from university as a result of COVID-19. This naturally, would have dire consequences for PBSA operators and the viability of future schemes. Less students obviously means less demand. And yet the figures, provided by UCAS, show that for this coming academic year, student numbers are growing. Some of the key statistics (up to 4th Sept) are as follows;
Overall placed applicants are up 3.4% versus 2019/20
Non EU placed applications are up 6.5% versus 2019/20
EU placed applicants are down 5.3% versus 2019/20
A record 40.5% of 18 year olds in the UK applied for a university place
Whilst many proposed that COVID-19 would mean that prospective students stayed away from university, the alternative of travelling or trying to secure employment in a recessionary market, are less appealing options.
The growth in numbers of non-EU students remains testament to the international reputation of the UK HE sector. Again, there has been the doomsday scenarios in the press that prospective international students would stay away from the UK due to COVID-19 related concerns has been disproven with these figures.
The one group that has seen a year on year decline is those applying from within the EU (excluding the UK). Many will point to COVID-19 as the primary reason for the reduction in numbers and there is potentially some truth in this, particularly with delayed results in a number of countries. However, there was always an anticipated reduction in applications because of the uncertainty caused by Brexit. At present, EU students enjoy the same fees as UK students. Now that we have left the EU, and a new deal is being negotiated, it is probable that future EU students will be required to pay the much higher fees that non EU students pay.
Recession drives the need to stand out from competition
The recessionary economic environment and an increasingly competitive labour market means that the opportunity to earn a degree will become more appealing. There is much debate about the value of the current day degree in securing future employment (29% of graduates obtained a first class degree in 2019 versus 11% in 2011) but it will not diminish the desire for individuals to improve their CV's and gain an advantage over the competition.
According to the Department of Education (DfE) 88% of graduates achieve employment versus 72% of non-graduates. In skilled jobs the gap increases to 69% of graduates versus 24% of non-graduates. This then translates into earnings, with the IFS estimating that men earn an additional £130k and women £100k over their working lives if they have graduated from university.
Undersupply remains in the sector
With growing numbers of students choosing to take up university places, the amount of PBSA remains short of demand. In their end of year report in 2019, Cushman and Wakefield reported that demand for student accommodation continued to rise 30% higher than the number of beds being developed. If you take into account the disruption caused by COVID-19 and delays to schemes, it is highly probable that this figure has only increased.
Cushman and Wakefield estimated that 25,000 new beds have entered the market with 3,500 exiting in 2020. This is the lowest amount since 2014, which is understandable given the disruptions created by COVID-19. There has been a reported 60% drop in completed transactions from February to July, although July saw the highest number of completions during this period, signifying a returning confidence for the sector.
What does this mean for the PBSA sector?
At the start of 2020 most predicted that the PBSA was set for a record year. And yet the impact of COVID-19 has left the sector in a somewhat unusual situation. All the reasons stated above show that the demand and need for PBSA is greater than ever before. Investors, developers and lenders alike should be confident that the data backs up the need for new schemes. However, PBSA appears to have become intertwined with sensational headlines that continue to appear in the press regarding the future of the UK HE sector. A classic example being the an article stating the University of Cambridge's apparent decision to teach all courses online this coming academic year. It proved to be untrue and prompted me to write about the plans for all of the top 50 universities in the UK. Indeed 97% of all universities are offering on campus learning this coming academic year. Only last week the BBC wrote an article claiming there was 'guidance' that universities should switch to online learning, only to reveal that this was the opinion of an academics union.
Naturally there is a relationship between the health of the UK Higher Education sector and the success of PBSA. Should there be a second lockdown and if universities were to close again, there would be a significant impact on the PBSA sector. However, the indications from the Prime Minister and his government are that educational establishments will be the last to close. Should there be an outbreak in a particular location, the Prime Minister, said on 10th September, there is "a clear request not send students home, so as to avoid the virus spreading across the country".
As the 2020/21 academic year begins there will be further media scrutiny regarding the UK HE sector. Sensational headlines will no doubt accompany such scrutiny. I believe that it is important that we stick to the data to give investors, developers and lenders the true outlook. If we do that we can see that PBSA remains a great asset class to be involved in.
How can Montpelier Private Finance help?
We have extensive experience in the PBSA sector and long established relationships with key lending partners, in order to procure market leading funding solutions for our clients. Even in these difficult times we have been able to procure terms of 90% loan to cost (LTC) / 70% loan to gross development value (LTGDV) for our clients. If you have a scheme you wish to discuss please get in touch or find out more about us here.
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