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Is the addressable market for PBSA being exaggerated?

Posted by Richard Ward

Despite the challenges operators have faced over the last 18 months, investors and market commentators have remained confident about the prospects for purpose-built student accommodation (PBSA).

However, with several locations already oversupplied or heading that way, is the attractiveness of PBSA being oversold by industry stakeholders or does the market simply need to assess fundamentals in a more nuanced manner?

The market has historically relied on the student-to-bed ratio to ascertain whether a market is undersupplied. However, increasingly this is being seen for what it is, far too simplistic to truly grasp whether a market can absorb additional PBSA or not.

Firstly, it entirely ignores the role Houses in Multiple Occupation (HMOs) play. Nationally, HMOs equate to ~70% of all private student accommodation and on average provide a more affordable option for students. Without considering the supply of HMOs, all locations will appear undersupplied when using a metric such as the student-to-bed ratio, the reality as operators know, is this is simply untrue.

Secondly, the ratio fails to consider the cost of accommodation and what proportion of students can afford a particular price point. Again, the ratio assumes that all students can afford to live in PBSA. However, with the average cost of PBSA consuming ~83% of the maximum maintenance loan outside of London, most domestic students would need to rely on financial support or a part-time job to cover day-to-day living expenses.

For many domestic students, the opportunity to live in a house with a group of friends is also seen as a rite of passage. Whilst HMOs do not provide the same level of amenities that most PBSAs offer, for some students the freedom of making it on their own is a draw itself.

Lastly, the data source also needs to be critically assessed. For example, is the data impartial or does the source face a conflict of interest, such as trying to sell an asset in the very location that is being considered? In these scenarios will the data provider offer an unbiased view if it risks deterring the buyer?

These shortfalls can and have led to the addressable market for PBSA being overstated, leading investors to enter markets that are perhaps already oversupplied or with a product that does not fit the local demand profile.

Sheffield has been a prime example of this, with more than 10k new PBSA beds delivered between 2017-2021. At face value, we can see why. There is demand for ~48.5k beds in the city but still less than 31k PBSA rooms available, suggesting a positive student-to-bed ratio. Closer inspection, however, suggests fundamentals have deteriorated. During this period, total bed demand is estimated to have grown by ~3.1k students, far below the +10k additional PBSA units delivered. If we only consider growth in international students, the primary target market for PBSA, the picture is even starker.

In these situations, investors will need an extremely attractive scheme or may need to consider whether they can attract domestic students to fill any shortfall in international demand. However, with HMOs in Sheffield commanding a headline rent of £93pppw and an average student search budget in the city of £117pppw, higher-priced PBSA schemes are likely to find this difficult or near impossible. For example, of those schemes entering the market for 2021-22 the average rent is ~£165pppw. This can be compared to the distribution of property impressions by price and type, suggesting a significant difference between the demand for HMOs and these new PBSA schemes, as seen in Figure 1. Short of a spike in international demand, these assets may therefore need to rely on taking market share from the competition.

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In markets that have become oversupplied with PBSA, it is not uncommon to see owners apply for planning to let to non-students, such as in Cardiff, a trend in place even before the impact of Covid-19. This is a further sign that demand may not be as high as previously thought.

To analyse supply and demand effectively, HMOs must be considered alongside PBSA, in addition to local demand metrics such as unit mix preference, intra-city location, budget distribution and more. For extremely high-end developments unlikely to compete for domestic students, existing and future competition, as well as student price sensitivity are likely to be important considerations. Of course, changes to future supply and demand must also be analysed to understand whether a particular scheme will remain competitive.

The UK continues to be an attractive location for international students and with the UK government aiming to increase numbers significantly over the next few years, demand will continue to grow. However, it is not without risks. In the short term, international travel bans could create some immediate headaches for operators, whilst the rising quantity and quality of Chinese institutions should be watched closely. Meanwhile, despite a slowdown in planning at a national level there remain pockets of activity, with Nottingham in particular witnessing a huge rise in planning applications. These ongoing changes to supply, as well as demand, need to be analysed carefully to grasp an understanding of the opportunities and threats.

The UK student accommodation market has undoubtedly performed well in recent years and even in the face of Covid-19 it has largely outperformed other asset classes. However, the polarisation of demand growth across cities and rapidly changing fundamentals due to an influx in PBSA, means investors will increasingly need granular, timely data covering all aspects of the market to ensure their products are fit for purpose.

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About StuRents:
- StuRents is one of the leading proptech partners in the UK student accommodation space
- StuRents operates, the largest student-centric accommodation search platform, listing over 750,000 bed spaces nationwide
- Beyond search, StuRents facilitates integrated online tenancy signing, tenancy payments and app-based tenancy management solutions
- This unique, vertically integrated end-to-end solution underpins StuRents' data insights and research capabilities