Demand Remains Resilient at Higher Tariff Providers
13th Aug 2020
The student market and purpose-built student accommodation (PBSA) has become an increasingly popular asset class for institutional investors due to its long-term, income-generating properties.
The awareness and appetite to invest in the market can be seen not only in deals such as Blackstone's £4.7bn acquisition of iQ Student Accommodation but also in the number of newbuilds being proposed.
Figure 1 highlights the number of student PBSA beds submitted and approved since 2014 and the rise in activity that led to more than 70,000 units being put forward in 2016 alone. Whilst some of these proposed developments will never come to fruition, it highlights how the market rapidly grew in popularity.
However, the level of planning activity has begun to trail off, with a clear downward trend being present since the start of 2017. The slowdown may be attributed to some of the larger early moving markets such as Newcastle and Cardiff becoming saturated with PBSA. As a result, the number of opportunities has reduced, with the seemingly low hanging fruit harder to come by.
With much of the UK economy coming to a standstill in March, it is no surprise that planning activity almost dried up entirely in the second quarter of 2020. In the three months ending June 2020, applications totalling fewer than 3,000 beds were submitted, whilst some 3,395 were approved. Compared to the equivalent period of 2019, this represents a reduction of 73.1% and 43.9% respectively. With continued uncertainty in the market with regards to how Covid-19 will impact short-term demand for beds, particularly from international students, it may take some time before activity recovers to levels recorded before lockdown.
Whilst there has been a slowdown in activity at a national level, this has not been the case for all locations.
What is clear from levels of activity in the market is how opportunistic investors are constantly looking for the next location. A few years back this was Cardiff, which saw a dramatic rise in applications, leading to the delivery of more than 4,000 beds between 2017-2019.
During this time, StuRents estimates that demand for beds grew by an additional 1,835 students, with a proportion of this demand likely to live in HMOs. Whilst simplistic, this highlights the discrepancy between supply and demand growth, with the former outstripping the latter by a significant margin. As a result, in Cardiff application activity has all but ceased, as illustrated below.
The focus has therefore shifted to markets such as Nottingham, which has reported a substantial rise in planning activity.
Between 2016-2017 just over 1,500 beds were granted planning permission by Nottingham City Council. However, from 2018 to 2019 this figure grew to 4,647 beds, with a further 1,659 units given the green light year-to-date.
When assessing growth in demand, it is clear to see why Nottingham has become popular with investors. For example, there were more than 4,800 additional full-time students studying in Nottingham in 2017 compared to 2015, a much higher figure than the number of beds granted planning permission over the same period.
However, as has been the case in markets such as Cardiff and Sheffield to name but a few, the risk is that investment into the city continues unabated, resulting in an ever-increasing pipeline, whilst demand deviates from its current trajectory.
Nottingham now has the third-largest pipeline in the UK, with more than 7,500 beds either approved or awaiting a decision. Given the historical growth in students, if all these beds are delivered, it will likely result in more units being added than additional students looking for accommodation.
Whilst nationally the long-term supply vs demand dynamics remain largely positive, individual locations require more detailed analysis to ascertain the long-term attractiveness of investment opportunities. Otherwise, owners and operators may find themselves in a market with rapidly changing fundamentals.
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