Posted inAnalysis

Will investing in student housing always balance the books?

It is said that nature abhors a vacuum, and what is empty will soon find something to rush in and fill it.

Investment follows the same story. Investors, seeking to make more money from their money, seek out and invest in opportunities to do so.

So, it should be no surprise that private equity firms are reportedly ‘ramping up their investments in the UK’s student accommodation market’.

That tidbit came to me via a press release a couple of days ago, which referred to a May report from Jones Lang LaSalle called UK Living Capital Markets.

The proportion of private equity going into this space, according to the report, accounts for 34% of new deals, and is up from an average of 17% between 2016 and 2019.

“Investor demand for the sector remains high,” write the authors, “although the debt markets are still erring on the side of caution for PBSA compared to other living sectors.”

Steady income stream

Going forward, the future appears to be a rosy one.

The authors continue: “From an operational perspective, occupancy is currently above 80%, having been below 50% in early January, due to the most-recent lockdown. The latest ONS student covid-19 impact survey shows that most students who intend to return to their term-time address will do so in March and April, regardless of whether their course has fully resumed face-to-face teaching.”

There is not much of a case to be made for staying away from investing in student accommodation right now. As the cost for most accommodation is paid for by student loans, and courses run from three to four years for full-time students, there is a guaranteed steady income stream, particularly as most accommodation is paid for in advance semester by semester.

Student numbers have also been growing steadily in recent years. In 2012-13, there were 2,340,490 students in higher education in the UK. This number ebbed and flowed up to 2016-17, but rose afterwards to 2,343,095 in 2017-18 and 2,382,970 in 2018-19.

According to the government, there was 2.46 million students in higher education between 2019-20. The Guardian reported last year that, amid rising numbers of international students, the proportion of 18-year-olds going into higher education was going to reach 36%, a new record.

Competition for places

These students need places to live and, unfortunately, there is a shortfall.

Unite Group, a student accommodation provider posted a market review in April. It reported: “The PBSA sector now provides homes to over 680,000 students, representing around one-third of the UK’s student population. At this level, there still remains a circa 310,000 shortfall in beds compared to the numbers of 1st-year and international students, before taking account of the increasing numbers of 2nd and 3rd-year students who are choosing this type of accommodation.”

It went on: “2020 saw the delivery of an additional 25,000 beds across 32 different UK markets, of which just over half was delivered in the 27 cities in which Unite operates. New supply in London remains very constrained, with less than 2,000 beds delivered in the year, reflecting limited land supply and more restrictive planning requirements for student accommodation in the new London plan.”

So far, so good, but is there any chance that student numbers may go down?

Spiralling costs

Well, actually, yes. For one, tuition fees have been steadily rising since they were introduced in the late 1990s under the Labour government. Back then, they were £1,000 a year, capped, for most students. This jumped, essentially, to £3,000 a year in 2003. In 2021, according to Ucas, they can now be up to £9,250 a year.

Leaving university nearly £30k in debt would be okay if the work was there to support in paying it off. But the unemployment rate for recent graduates, according to Jones Lang LaSalle, is currently 12%, up from 6.7% at the beginning of 2020.

As they put it: “Although the GDP outlook for the 2021 and 2022 show a strong rebound in growth, the jobs market may take longer to recover.”

That is if the jobs are there. According to the UK government, the median average graduate starting salary is £29,000. And a lot of industries require the insulting use of unpaid internships, often for months on end. Many jobs ask for even more now, requiring an MA, a further year of expensive study, as a dealbreaker. Getting a degree, which used to be seen as a golden ticket to success, means less than it used to.

None of the various jobs I’ve done along the way of my haphazard career—language teacher, bartender, computational linguist, tax officer—have needed any particular skills from my two literature degrees. Studying for an English Literature degree was really attending a really expensive book club for three years, and one that I’ve just finished paying off.

There is a good theoretical argument to reduce the requirement for degrees in the workforce. And, if the financial burden for education continues to lie more and more heavily on the student population, there may also be a practical one.

For funds that put their money into investing in student accommodation, that might be an unwelcome development. But if they want those investments to pay off, we should be thinking about the students and not just the places in which they live.

Pete Carvill

Pete Carvill is a reporter, writer, and editor based in Berlin who has been writing for the B2B and mainstream media since 2007. He is a contributing writer for Expert Investor and, in addition, has...

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