Balancing supply-demand imbalance with affordability

According to Research from StuRents, the 2024-25 student lettings cycle started unseasonably early in some cities, reflecting the shortage of student housing across the UK. Student rents are on the rise, meaning the affordability of student accommodation is set to become a greater challenge for students in the coming years. Furthermore, the delivery of new PBSA has continued to slow, with less than 12,000 beds ready in time for the 2023-24 season, down from more than 36,000 in 2019.

Richard Ward, Head of Research at StuRents, states, 'Supply-and-demand fundamentals in the student-accommodation sector remain extremely bullish for the UK operators. These dynamics are driving unprecedented rental growth'.

Growing demand driving investment 

PBSA could expect to see investor growth if capital is redirected from sectors such as office and retail. As students' average maximum search budgets (excluding London, which is typically a more expensive city for accommodation) grew by 7.3% in 2023-24 to £152 per week.

Darren Gardner, CEO at Nido, says the UK 'continues to be propelled forward by the mathematics of the supply-demand imbalance, the demographic increase in the supply of domestic 18-year-olds, and the high number of international students continuing to flock to UK universities.'

Domestic demand remains strong and is expected to grow by 30% by 2030. Due to the number of 18-year-olds in the UK, there should be an additional 400,000 students in higher education by 2035. 

Meanwhile, delivery of new beds cannot keep up with demand. In 2023, planning applications dropped by more than 75%. StuRents predicts that there will be a shortfall of 490,000 beds by 2026. 

The shortage of beds is only exacerbated by buy-to-let landlords beginning to sell their properties and exit the market due to factors including suggested legislation from the UK government, rising mortgage costs, and inflation. An estimated 400,000 privately rented properties have been sold in recent years. 

HMO private landlords exiting the market presents an attractive alternative opportunity for investors to capitalise on. 

According to Savills, investment volumes in UK PBSA remained relatively resilient in 2023, while, In real estate more generally, transactional activity was declining. There is an optimistic outlook for the sector, with the potential of investor growth capital being redirected from traditional sectors.

Potential investment risks

Of course, the investment opportunities vary greatly across different university towns and cities. Locations such as Bristol, Edinburgh, Exeter, Glasgow, Liverpool, and Manchester are popular with investors, while the markets for student accommodation in Sheffield and Coventry offer less opportunity.

Investors should also be aware of how political developments might affect the market. UK universities are becoming increasingly dependent on international students subsidising capped fees for domestic students. Applications from international students rose overall by 2% for 2023-24, and this number was almost entirely driven by non-EU students.

In May 2023, Suella Braverman, then home secretary, announced that international students would no longer be able to bring dependents with them on their student visas unless on a research postgraduate programme. This step to reduce immigration related to academic study could have a significant impact on the financial viability of many higher education institutions.

Similarly, investors should be aware of the overall reduction in the amount of places offered to students proposed by the Conservative government in 2023. In July 2023, Rishi Sunak announced plans for stricter regulations on universities offering courses with poor employment prospects which could also affect the number of students choosing to attend university.

Rising construction costs and inflation also continue to pose significant challenges for developers. 

Read the full article on IPE Real Assets.