Purpose built student accommodation – a wise investment choice?
What is purpose-built student accommodation (PBSA)? And how does it work? Is it a good investment? We assess the pros and cons of PBSA as an asset class.
What is purpose-built student accommodation?
Purpose-built student accommodation, or PBSA as it is better known, is property which has been built specifically for students. These projects are funded exclusively by the private sector.
The accommodation consists of self-contained units, with communal facilities such, as a shared kitchen and other amenities. PBSA has evolved to offer a high-quality living experience for students. Typical amenities include communal living spaces and working hubs with excellent Wi-Fi. Often PBSA offers extra luxuries like a gym and media room for their shared tenants.
Why have they been created?
Student admissions are rising and there are not enough student halls to meet this demand. The demand for halls is three times higher than current facilities from campus buildings. And this is where the private sector comes in.
As these properties are built for purpose, they offer all the amenities that many students crave. Independent space, but with shared facilities, built to a high standard allowing them to mix in style.
What have they replaced?
PBSA has eaten into the market share of traditional student accommodation, which is a student HMO (house of multiple occupancies). This type of accommodation is usually a shared terrace house. Often this means outdated small bedrooms with cramped communal rooms. This is a far cry from the comfort provided by PBSA.
Student admissions are at an all-time high. According to Savills, UK admissions during the academic years of 2020/21 and 2021/22 were the highest on record. They perceive next year to be equally strong, with the third successive year where there are over 600,000 first-year undergraduates.
These increased admissions will put huge pressure on student accommodation levels, where demand is out stripping supply.
With the current property landscape changing for traditional student accommodation (student HMOs), there is an even greater demand. Recent changes in respect to mortgage tax and regulatory changes have led to a lot of private landlords selling up in the wider property HMO market. This has added to the supply shortage.
With the UK being an education centre of choice for many overseas students, there is an even stronger demand for PBSA. This is because PBSA tends to be the accommodation of choice for this market segment. This makes sense, with the majority of international students having affluent parents, who can afford the increased costs of quality accommodation and higher university fees.
Separate research undertaken by Savills in Q4 2021 shows that PBSA remains incredibly resilient in a post-Covid world. Occupancy rates for PBSA are more than 94% for this academic year.
Yet, despite this huge demand, investment in PBSA has not increased to match the market need. The chart below shows money spent on development projects in this area of the market in the UK. A potential reason for this lack of development could be a hangover from Covid last year in the construction sector. Alternatively, it could be a response from some developers waiting to see what happens in the market, due to inflationary pressure on building labour and material costs.
According to CBRE Group, PBSA delivered a 7.7% return in the last 12 months despite the impact from Covid. They anticipate stronger returns on the horizon. Tim Pankhurst, Executive Director of CBRE Student Accommodation Valuation & Advisory commented, “Supply can’t keep up, with the delivery of new PBSA supply, hindered by increasing build costs and land availability. These dynamics have contributed to strong investor sentiment and we expect that the appetite for good quality PBSA assets will continue into next year.”
Is PBSA a good investment for me?
Overall, PBSA remains a good investment choice. Many investors like this asset class as it offers a very high yield (7%+), coupled with an almost guaranteed rental demand, with no void periods. With several tax advantages in purchasing PBSA compared to typical buy-to-lets, this asset class is an excellent way of gaining a safe but high investment yield. This is of particular interest to investors who are either retired or are approaching retirement. This investor segment is looking for a way to increase their income passively. PBSA fulfils this requirement as it is a hands-free investment.
However, for younger investors, who are striving for capital growth and who want to use mortgage finance to leverage their returns, there remain better options.
Existing investors in student property can read our article on is PBSA better than Student HMOs to see which option is better for you.
At Esper Wealth, we take a consultancy approach to investment. This means we take the time to understand your specific investment needs. This approach is crucial, to giving you the best advice. You can find out more about our approach, on our about us page.
If you are interested in PBSA, you can find information on our latest offerings on our developments page. Alternatively contact one of our property consultants who will be very happy to help.