The continued success and resilience of the PBSA sector has been well documented. As a new academic year begins, the sector finds itself once again in growth against the figures of 2019 (you can read more here). The sector now accounts for 1 in 3 student beds in the UK, the highest in Europe, but the opportunity remains for PBSA to strengthen its position further. The question is whether it is prepared to take the opportunity?
The Increased Demand For PBSA
Before looking at how the PBSA sector takes a greater market share it is important to understand the context of the demand for PBSA. Whilst student accommodation has long been a hot topic for local communities, the acute housing crisis has raised the demand for PBSA in favour of local housing stock being assigned to students.
At a planning approval meeting for a 13 storey PBSA development, Councillor Graham Chapman, from the Aspey Ward, Nottingham, recently stated "The problem that we have is that if we do not accommodate students then they will move to private sector residential lets in the midst of communities". The knock on effect is inflated rents in the private rental market as well as reduced stock.
Nottingham is not the only location that is crying out for PBSA. As I have previously detailed, the University of Bristol has even offered cash incentives for students to defer for a year. Last week it was reported that the University of York has experienced such accommodation shortages that students are being housed as far away as Hull, whilst it awaits new PBSA stock becoming available.
The demand therefore for PBSA, albeit location specific, from local communities, universities and local authorities gives investors in PBSA a perfect opportunity to expand the market share of the sector.
How does PBSA capitalise on the opportunity?
The demand for PBSA is of course hugely positive for the sector, but there needs to be consideration for how that opportunity is seized upon.
Affordable Alternatives
PBSA commands significantly higher rents than that of Houses in Multiple Occupation (HMO's) which makes the accommodation unattainable for a significant proportion of the market, particularly domestic students. For PBSA to truly break through into the HMO market, there needs to be a more affordable product. StuRents recently wrote about the disparity between HMO and PBSA rents, citing the example of Sheffield where HMO's command an average rent of £93 per week versus an average of £165 per week for PBSA schemes entering the market for 2021/22.
The question is, how this is to be achieved? Whilst the cost of borrowing is currently low and likely to remain so for the next 18 months, the cost of materials has risen sharply in the last 12 months. The profit on cost for the development of a scheme will become increasingly dependent on the revenue of the scheme, countering the incentive to produce accommodation that is more affordable to students.
Premium amenities such as gyms and cinemas can likely be forgone for a more affordable offering, but it will be important that the student experience and wellbeing is not compromised by poorly designed schemes, such as those that have been permitted in the past (look no further than the 2013 Carbuncle Cup winner, 465 Caledonian Road for the University College of London).
Enhanced Offerings
With Universities increasingly favouring partnerships with the private sector to meet their accommodation needs, there remains the opportunity to replace the crumbling halls of yesterday with a modern PBSA offering. In addition, some of the 1st generation PBSA schemes are starting to look outdated and uncompetitive compared the most recent offerings. Our client Audley Modular Student Living's most recent scheme, Mayfield Road, boasts self-regulated underfloor heating and electronic key access along with a gym and cinema room.
With an increased focus on students' wellbeing and experience, there remains the opportunity to grow in locations where occupancy levels have been compromised by quality, subject to the aforementioned affordability issue being addressed.
Undersupplied Locations
There is often media attention on saturated locations, and there is no denying that these locations exist. However, as already highlighted there are locations where PBSA schemes are needed and desired. With the student numbers at national level in growth; demand across the whole pricing spectrum will remain.
However, ascertaining where that demand lies will always require detailed local market knowledge. Taking the most recent UCAS information, higher tier Universities are showing significantly increased admissions compare to that of middle and lower tier Universities. This will no doubt be good news for those looking to offer premium PBSA offerings to the Non-EU student population that continue to flock to the higher tier Universities. It is however, a warning shot to investors of the growing chasm between the top Universities and the rest of the field.
Will The Sector Take The Opportunity?
The opportunity for premium schemes achieving, at times, eye watering rental figures will no doubt remain, but on an ever reducing basis. For the sector to truly move on investors have to get comfortable with offering a more value orientated offering, but with wellbeing and experience in mind. The size of the opportunity should forego the reduction in revenue compared to the premium offerings.
I believe the desire to meet this opportunity exists, but the pace at which it can be delivered could be hindered by the increasing costs of raw materials. As is often the case, it will be the largest operators with the greatest bargaining power (and largest cash reserves), that are likely to seize the opportunity first. One thing that is for certain, is that the bubble has most definitely not burst on PBSA.
How Can Montpelier Private Finance Help?
Montpelier Private Finance has a flair and passion for the student accommodation market. We have extensive and detailed understanding of the sector in order to secure market leading development and term funding for our clients. If you wish to find out more, contact us here.