The UK student market is a robust asset class providing secure returns whilst remaining one of the most attractive, in-demand asset classes prevalent in 2018. As a result of the current economic climate and the decrease in the sterling’s value, capital from overseas is booming more than ever before in the UK.
Overall, 2017 was a strong year for the student sector, the appetite for student property remained strong due to high demand and evidence of yield compression in the UK’s top university locations. As a result, the UK’s development pipeline has reached historically high levels. Over £4bn was conducted with many deals achieving record yields, despite a minor drop in applicants, the demand picture remains consistent. These increased levels are likely to continue so investors look to opportunities.
Student accommodation has underlying dynamics driving the investment case:
Excellent performance during previous recessions, highlighting resilience.
Rental growth outperforming inflation in recent years.
The persistence of the UK’s higher education system with increased international appeal.
A diverse demographic with an increased number entering higher education and the global middle class projected to grow significantly.
University is the premium option of higher education and over 564,0000 people applied for higher education in 2017. Consequently, depending on the area, demand is increased and due to under supply of housing in most major cities this pushes up the rental returns available for buy-to-let investors.
Stimulating much debate is how the Brexit decision and slow withdrawal of the UK from Europe will affect the demand for university spaces and the number of UCAS applications, the potential impact remains uncertain. Despite this general level of uncertainty, premium levels of education and favourable exchange rates have established the UKs power to secure overseas students moving to the UK to study and these figures are set to increase further.
In a breakdown of the current student population, 81% are from the UK, whilst 13% are from outside of the EU and 6% are from within the EU.
By far the largest non-EU country accounted for is China. In an accumulation of our total population in the UK, Chinese students now account for 95,090, a 13.5% increase since 2013. Closely following is the student population from Hong Kong which has surpassed this rate of growth with a 27.6% increase for a total of 16,680 students studying in the UK, representing the highest amount of non-EU applicants ever recorded.
Similarly, a main driver of growth has been an increase in EU students who represent 6% of all full-time students in the UK. In each of the last 4 cycles EU applications grew between 5% and 10%.
There are fears circulating that a reclassification of EU nationals as ‘international students’ as soon as the UK leaves the EU would see a dramatic increase in their tuition fees. The suggested figure of a 50% increase could act as a clear deterrent for students choosing to study in the UK. On the other hand, the spike in tuition fees may raise student expectations and encourage a greater focus on good employability outcomes.
According to a recent government announcement, EU students applying to commence their studies in 2018 will still be able to obtain funding for the whole duration of their course and it is understood discussions are taking place to consider the potential to offer EU students commercial loans, with students set to lose Student Loans Company funding when the UK leaves the European Union.
Additionally, they may fall victim to tougher new net migration targets, effectively capping overseas students.
Amber Rudd, ex Home Secretary, told the Conservative party conference that there must be strategies in place for tighter regulations for foreign students.
1987 saw the introduction of a scheme allowing overseas students to study in the UK for free for one year. The Erasmus programme included living expenses and has benefitted over 200,000 students since it was established.
Considering the UK student market, applications from England and Wales fell 2% compared to the previous cycle’s figures, while Northern Irish fell by 3%. Universities UK concluded that these statistics could have been a result of a fall in the number of 18-year olds across the UK population that would form part of the first-year university intake. Higher fees could be to blame for the minor decline in applicants.
91% of international higher education students across all levels were satisfied with their university experience in the UK. Due to this positive figure, the UK has experienced a 2.2% rise in applications from students outside of the UK since 2016.
There has been a notable increase in the number of master’s students, up 6.25% from last year, this is perhaps due to a new loan scheme for master’s funding. Initiating in summer 2018, there will also be a loan scheme of up to £25,000 for postgraduate doctoral courses, which will more than likely trigger an increase in doctoral numbers across the UK.
UCAS measure the capability and academic attainment of a student based on the tariff level of the university. Medium to higher tariff institutions (those deemed as retaining a higher level of student) have seen a 0.4% increase in acceptances whereas lower tariffs have seen a decline of 5.4%.
Overall, the total number of students has rocketed and is currently sitting at the highest recorded level since 2013.
UK student accommodation yields have recently experienced less volatility than other real estate sectors and investor activity in the UK commercial market proves resilient and concerns that the market has reached its peak, underpinned by fears over the impact of Brexit on the sector, have proved unfounded.
The rental growth of student accommodation in the UK has surpassed all other asset sectors by reaching an accumulative transaction value of £3.5 billion in 2016 and £4.6 billion in 2017, with significant investment from international sources.
Over 2017, investors remained pragmatic as the UK is viewed as a stable global property market. The first step for investors and developers is to target cities that present the most sustainable opportunities. There is a rising trend for developers and investors to obtain refurbished opportunities, a substantial saving over acquiring new sites and new build developments.
Purpose built student accommodation has helped the sector form a prominent part of the wider UK commercial investment market. With continued investment from both international and domestic investors over the course of the year, a relatively weak pound has attracted international investment and additional applications from non-EU students.
Prime yields for university leased, long term income have followed the wider investment market trend and driven investors to be led by the strength of university covenants and the underlying residual value of the PBSA sector.
The London PSBA market has also outperformed previous years with many direct let transactions at record yields and an increase in investment from 2017 to now is expected to increase by £5.3bn in purpose build student housing.
In both private and university owned purpose-built accommodation, the estimate figure of asset value is now £43 billion in the UK. There are 525,000 PBSA bedrooms, alongside planned consent for another 150,000 in the pipeline across the UK. This has been driven by the increasing demand.
‘According to a recent report by Savills, investing in student accommodation is forecast to rise by 17% in 2018.’
Just over two decades ago, the UK student population was 1.5 million – today it’s 2.27 million, proving student accommodation as a lucrative sector for institutional investors to entrust their money. Prime yields for modern, income producing assets in the best university cities are now in the range of 5%-6%.
Previously, small falls in student numbers are having a little effect to diminish rental growth as it has remained healthy over the past 12 months. There is a correlation between cities that have seen high levels of regeneration and development and low or negative percentage changes in annual rent. At a smaller level, the market remains structurally undersupplied and overall applications for places are up to 31% over a 10-year period.
2018 is expected to continue in a similar way to 2017, with demand in the sector being underpinned by PBSA’s strong cash generating characteristics and its reputation as a ‘safe asset’. According to a recent report by Savills, investing in student accommodation is forecast to rise by 17% in 2018.