Why university acceptance numbers are very encouraging for PBSA developers

Current market context

The future viability of purpose built student accommodation (PBSA) as a quality investment has been the source of much discussion since our lives were turned upside down by COVID-19.

The press has frequently speculated about the consequences of COVID-19 on universities for the upcoming academic year. Questions have been raised as to whether international students will stay away from the UK, and whether students on the whole will defer entry for a year until the virus has hopefully passed. There has also been the frequent reporting (and mis-reporting) of how universities plan to tackle the challenges of social distancing for the coming year, that could impact on whether students choose to take up their places.

With the future revenues of universities being drawn into question, the knock-on impact for PBSA developments has also come under the spotlight. In simple terms, if universities suffer severely impacted numbers of students attending, demand for accommodation will be affected. With this in mind, some lenders have pulled back from the sector altogether, or revised their offerings.

What is the current reality?

Over the past couple of months I have tracked closely whether the concerns, so vividly played out in the media, match the reality of what is actually happening. Following the widespread reporting that the University of Cambridge would be teaching all courses online in 2020/21, I actually found that all of the top 50 universities were planning a 'blended' teaching approach that required students to be on campus (read the blog here).

The strongest indicator in how the coming academic year will look, is the number of students that have accepted applications. The deadline passed on 18th June and the numbers released by UCAS are as follows:

• 1.2% increase vs the previous year in students confirming their places

• 0.7% drop in students choosing to defer their course by a year

• 12% increase in non-EU students accepting a place

• 6% decrease in European students accepting a place

• An overall increase of 1% in confirmed places for overseas students

In response to these figures Claire Marchant, Chief Executive of UCAS said the 'numbers will also be welcome news for universities and colleges, and show their announcements on the blend of online and face-to-face learning most are planning to deliver have been building confidence ahead of the start of term'.

What does this mean for PBSA?

The figures should lead us to consider a number of factors. Firstly, the success of PBSA as an investment, is built on the foundations of the international reputation of the UK Higher Education sector. Coronavirus will not have affected that reputation. International students, predominantly from China, India, Malaysia and the US will still want to come and study at iconic universities in the UK. There is no reason why Russell Group locations shouldn't continue to flourish, and subsequently the demand for PBSA.

Some sections of the media seem to have been determined to link the governments handling of COVID-19 with a desire for international students to stay away. The numbers appear to reject that, although it still requires the students get on the plane at the start of term.

Secondly, it was widely reported in the build up to these numbers that students will most likely choose to defer entry until the following year, in the hope that COVID-19 has passed. Again the numbers seem to reject that and it makes sense. The two primary reasons that a student typically defers entry are either travel or work. In this current climate, the thought of travelling is almost certainly beyond comprehension for most. And as we enter a recession and the certainty of higher unemployment, finding work will be a challenge many wont want to face. With this in mind, coupled by the reassurances provided by universities that courses will be running with a 'blended' approach, university life will be the more appealing option.

Finally, these figures do not mean that everything is rosy in the garden for all universities. Universities are businesses and are therefore still impacted by COVID-19. If there are universities that were operating on wafer thin reserves prior to the pandemic then there is every chance that they will be relying on government support if they are to survive. Universities who do not generate significant income from research are likely to be hit hardest. However, whilst this is worrying, for context, it is widely accepted that Russell Group universities would not be on the list of those at risk, as they benefit from two thirds of the UK's research revenue. The reality is that there is a significant gulf between the top ranked universities and those at the bottom end.

This, of course, can have an impact on the viability of future PBSA schemes. But this warning does not change my overall opinion of PBSA as a potentially good investment, even taking into account the current situation. When I wrote about this recently (you can read it here), the potential success of a scheme was reliant on the quality of that specific project. The macro and micro location, cost efficiencies and tenancy periods are all vital elements to a scheme's success. This hasn't changed; the current environment merely highlights the importance of such considerations.

For lenders, looking to support schemes there will no doubt be extra attention given to the locations of schemes and the strength of the university concerned. This will be particular true for those schemes with nomination agreements, which in the past may have been viewed as favourable security by a lender. In the current climate it may well be the case that lenders will want to see the economic strength of the university, in order to ensure it can meet its long term financial commitments. Whilst there might be tighter scrutiny from lenders, in my opinion, there remains no need to shy away from the market as a whole. Demand for accommodation still outstrips current availability, meaning the right scheme will perform well.

How can Montpelier Private Finance help?

We have extensive experience and knowledge of this sector and sourcing funding and investment across the capital stack. We take a granular approach to understanding the merits of each scheme to ensure we are able to offer market leading solutions. We have well established relationships with lenders and investors who appreciate our due diligence prior to putting a scheme before them. If you have a specific scheme you wish to discuss you can contact us here.

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