Digs for the future

University Business managing editor Hannah Oakman interviews James Pullan, head of student property at consultancy Knight Frank

The student accommodation sector has produced positive rental growth throughout every year of the economic downturn.

The most recent Knight Frank Student Property Index reveals rental growth in London is up 1.73% from the previous academic year, while, regionally, rental growth averages at 1.55%.

It looks as though this growth trend is set to continue. As James Pullan explained: “There is a lot of potential in the market. An awful lot of students cannot access student accommodation provided in private housing or university halls and some of what is on offer is rather dated and institutional in style.

“I think that is where the purpose- build student accommodation sector really comes in as it provides quality, communal spaces which resonate with the consumer.”

There is no doubt that students are becoming consumers and genuinely choosing a university based on achieving an employable result at the end of their studies. Universities in the UK are understanding this and constantly looking at improving their accommodation portfolios to attract the best students.

So how does James see the purpose- built student accommodation market performing this year?

“We are currently going through a period of extraordinary change. Investment on the occupational demand side is looking very solid; we will see steady, accumulative growth year-on-year. On the investment side, the market has never seen this volume of money coming in before.” Investment is coming mostly from the US and the Middle East.

“Investors in these areas are attracted to the student market in the UK; it’s considered a top destination. It’s also a controlled residential opportunity which is attractive as a high yield investment. They recognise that the UK market is comprised of international occupiers and lenders which is also a bonus.”

James added: “The weight of money and the limited availability of stock is causing yields to sharpen. The best universities still remain the primary focus for investors, as does London in general.”

Knight Frank is seeing new schemes in London which provide value accommodation in transport strategic locations, such as zone three, focusing on students who wish to pay up to £150–£200 per week. “We are hearing from investors that there is probably a requirement for around 100,000 student beds in London at that price point,” James explained.

Growth and trends

There is no doubt that there is a structurally undersupplied market in the UK (see map opposite). James continued: “The volume of houses of multiple occupation (HMO, shown in green) still present within the student market is structurally too high. When this is 25% or less, I think that is where the market will stablise and there will be an appropriate volume of purpose-built and university halls of residence relative to student numbers. There are always going to be students who want to live at home, live privately or purchase their own home. But HMO is a diminishing market. If you were to put a new university in a new city today, you wouldn’t plan for students to live within this structure.”

When looking at future trends, there are some definite points to watch. Knight Frank reports year-on-year growth for demand in en suite accommodation, particularly from international students.

Another is branding and the growth of the new operator platforms. As James explained: “The new entrants really understand that having a good brand adds excellent value to their portfolios. It is about looking after students far beyond their accommodation needs – it’s about building communities. The schemes which perform best have the strongest communal spaces at or around the entrance, following a ‘hotel-style’ design.”

So how does this relate to universities for the future? Funding options to deliver student accommodation are a key issue. “This market has transformed radically. There are now off-balance-sheet options for universities whereby the private sector will deliver student accommodation to their specification at a rent that is below market levels, with potential to acquire on completion of expiry.

“These off-balance-sheet options are being picked up by the most astute universities and we are working with a number of institutions which have realised the great potential here. The market moves very quickly and these current opportunities need to
be taken.”

 

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