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Tough times ahead for UK PBSA sector

Posted by Tom Walker in , ,

Image courtesy of Flickr, Creative Commons

The Purpose Built Student Accommodation (PBSA) sector in the UK has experienced a huge growth in popularity over the last few years, with all manner of financial institutions - ranging from sovereign wealth funds and pension & insurance firms to banks and Family Offices - investing in the asset class with hopes of realising a reliable return on investment that out performs most other asset classes.

However, with £5.9bn poured into the sector in 2015 and a forecast £4bn in 2016, there are fears that the UK's PBSA sector faces a tough decade ahead. A report by EY, a consultancy firm, predicts that demand for such accommodation will falter over the mid-term thanks to a dip in the demographic profile of UK 18 and 19 year olds, a growth in apprenticeship programmes and possible restrictions on international student visas.

The analysis, which predicts domestic demand for PBSA accommodation hitting a low in '21/'22, estimates that the international student acceptance rate to UK Higher Education Institutions (HEIs) would need to increase 63% on current levels to plug the deficit - unlikely given the current Government's immigration policy direction.

The outcome of this gloomy mid-term outlook is that developers and investors of PBSA will need to more critically appraise the current and forecast supply and demand dynamics for such developments on a city-by-city basis. Lower-tier universities will likely take the brunt of the forecast demand-crunch as reputable HEIs (such as those in the Russell Group) remain cushioned by undergraduates' desires for reputable degrees and future employability.

Even so, cities hosting top-tier universities will become more sought-after by investors and bids for suitable development plots will likely be driven higher as a consequence. As for existing accommodation assets in cities already exhibiting structural oversupply, competition for prospective tenants will naturally exert a downward pressure on pricing as owners of the assets look to maximise occupancy rates. In both cases, the outcome will likely result in a compression in income returns.

That said, for those investors willing to stick by their investments long-term, the report estimates a recovery in demand by the '24/'25 academic cycle, all else being equal.