Global property consultancy Knight Frank has highlighted a robust start to 2024 in the UK’s purpose-built student accommodation (PBSA) sector, with investors showing increased confidence despite broader economic uncertainty.
The first quarter of 2024 saw a significant uptick in investment in student housing. Knight Frank recorded 21 transactions in the PBSA sector, totaling nearly £750 million. This marked a rise from the first quarter of 2023, where investments totaled just £148 million, although it did not reach the highs of the boom years of 2021 and 2022.
The PBSA sector has shown remarkable resilience compared to other real estate sectors. Despite slight shifts in yields—about 50 to 75 basis points from their peak—the student accommodation market has remained stable. This resilience is attributed to the sector’s strong fundamentals, such as its counter-cyclical nature and the potential for attractive risk-adjusted returns, making it a favored choice among investors.
Changing Deal Structures
The latest report also points out changes in how deals are structured, reflecting adaptations to ongoing challenges in funding. While prime assets in top university cities continue to attract funding, properties in less prominent locations are increasingly turning to joint ventures.
Merelina Sykes, Joint Head of Student Property at Knight Frank, emphasised the sector’s strength, noting that significant investment has continued despite economic headwinds, signaling confidence in the sector’s long-term prospects.
Stabilising Build Costs
An encouraging development for the sector is the deceleration of build cost inflation. According to the Building Cost Information Service (BCIS), inflation slowed to 3.1% in 2023, down from a peak of 15.5% in 2022. This stabilisation provides a more viable environment for both new developments and ongoing projects.
Future Development Pipeline
Looking ahead, London leads with the largest pipeline of future student accommodation, with approximately 26,000 beds either under construction or approved for planning. Other cities with significant upcoming projects include Manchester, Bristol, and Nottingham, showcasing widespread growth across the UK.
The Political and Policy Landscape
The political and policy environment is set to play a crucial role in the PBSA market this year. Katie O’Neill, Head of Student Property Research at Knight Frank, highlighted that with an expected two interest rate cuts in 2024, any improvements in the debt environment could boost transactional activity. However, the upcoming general election and recent changes to student visa policies could pose challenges.
O’Neill warns that a misunderstanding of student visa numbers could lead to policy over-corrections, potentially impacting the financial stability of the UK’s Higher Education sector. Ensuring policymakers have a clear understanding of the economic contributions of international students is essential.
Despite some fluctuations and broader economic pressures, the UK’s purpose-built student accommodation sector continues to attract robust investment. With strategic adjustments to deal structures and a cautious eye on political developments, the sector is poised for sustained growth. Investors and developers alike remain optimistic about the opportunities this market will continue to present.