UK PBSA Market Continues to Demonstrate Strong Fundamentals
Student accommodation continues to be highly sought after by both existing and new investors, with UK PBSA specifically attracting interest from global capital interest. Relative to 2023, investment in PBSA has bounced back in the first half of the year, with CBRE reporting £2.1bn of investment into the sector in 2024 to date, three times higher than the same period in 2023. Investment volumes in the first half of 2024 have been boosted by Mapletree’s £1bn buyout of an 8,200-bed portfolio located in the UK and Germany along with two large UK portfolio deals. Project Aqua, 711 beds in Exeter and Glasgow, was bought by LGIM for £122m reflecting an initial yield of 5.3 per cent and Project Jade, a 4,335-bed regional portfolio, was acquired by PGIM from Unite for £184m, reflecting a 6.25 per cent initial yield. Single assets transactions include Pavilion Court, a 699-bed asset in Wembley, sold for £125.0m to Apollo, reflecting 4.65 per cent initial and Capital House in Southampton purchased by Greystar for £44m, 5.0 per cent initial. The abolition of Multiple Dwellings Relief (“MDR”) came into effect on 1 June 2024 and has resulted in pricing for some assets being impacted by up to 4.0 per cent by virtue of increased stamp duty charges. This will likely impact pricing of transactions into the second half of 2024.
The supply of new beds is forecast to increase in 2024, with best estimates indicating the delivery of circa 12,500 beds on average over the next four years. In the medium term, new supply remains heavily constrained with construction cost viability remaining challenging in all but the strongest markets, impacted by land value, planning, enhanced building safety standards and higher debt costs. The constrained supply is also being compounded by the falling number of Houses of Multiple Occupation (“HMOs”) with a range of factors forcing private landlords from the market. Since 2016, the stock of private rental properties has decreased by almost ten per cent, with the UK’s HMO supply decreasing by 146,000 beds over the past four years.
Demand for UK higher education is normalising post pandemic but remains very strong. UCAS, which represents around 90 per cent of total applications, recently published application data to June 2024 in respect of the 2024/25 academic year. Applications for higher tariff institutions, to which we are primarily aligned, have continued to grow, increasing 0.4 per cent year-on-year. Lower tariff institutions have experienced a further decline in applications, dropping 3.7 per cent, further demonstrating a continued flight to quality.
International applicants have fallen by 1.9 per cent, with the largest declines seen in applicants from Nigeria and India, a large constituent of this decline arising from dependant applications. This follows a tightening of rules for dependant family visas for masters students, a change which has not impacted us due to the single occupancy nature of the majority of our sites. Applications from China, the USA, Canada and the UAE continued to report modest increases. Non-EU international applicants remain 40 per cent higher than their pre-pandemic level.
Domestically, applications have reduced by 1.6 per cent compared to 2023, driven by a 4.9 per cent decline in mature student applications. Applications from 18-year-olds are up 0.6 per cent and are forecast to continue growing until 2030 due to the increasing size of the qualifying cohort.
The UK remains within the top four most-favoured international destinations for students originating from the USA, China and India and continues to perform well on relative affordability when compared with many other sought-after international destinations for higher education. Demographically, to date, we have experienced an increase in demand from international students which does demonstrate the resilience of the UK’s international student market.
These strong trends contributed to sector wide rental growth of eight per cent for the 2023/24 academic year, with Glasgow experiencing the strongest rental growth of all the major markets at 19 per cent. For the 2024/25 academic year, expectations for continued rental growth, in addition to anticipated cuts to the base rate of interest, have held prime regional yields stable across the sector during the first half of 2024.