Essay | Global Vision 2022

Student Housing: Another decade of demographic driven demand

By David Inskip

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The pandemic provided one of the toughest imaginable operating environments for higher education institutions and the providers of purpose-built student accommodation (PBSA). However, investment markets remained sanguine. A key factor was the positive demographic outlook. This paper examines how demographic trends remain supportive of PBSA markets globally, with a particular focus on the UK. We consider the headwinds to this positive outlook and how the patterns of global demand could change. We conclude that the sector will continue to provide attractive opportunities to suit different return and risk profiles, while a wider range of prospects across countries, cities, and institutions is likely.

Student housing demand proves resilient, again

When considered alongside commercial real estate sectors, student housing’s relatively short leases and variable cash flows theoretically leave the sector more exposed to economic disruption. However, the Covid-19 pandemic was not the first time the sector has demonstrated its resilience. Looking back over recent decades, we can see demand for higher education, and consequently demand for student accommodation, has demonstrated counter-cyclical characteristics. At points in time when economic conditions have deteriorated, people have increasingly chosen to invest in their skills rather than enter an uncertain jobs market. 

As illustrated by Figure 1, two of the periods showing the greatest increase in full-time student numbers in the UK directly followed the dotcom bust and the global financial crisis (GFC). Data from the US displays a similar trend, where the GFC prompted an unprecedented increase in student numbers. Over the period 2008-2010 the number of students enrolled in post-secondary institutions jumped by almost 15%. In years of economic expansion enrollment growth has tended to be less than 2%. Admittedly, current enrollment growth is likely to be less pronounced than post-GFC as unemployment has been more stable and job vacancies are at record levels.

Also, this was not an ordinary economic downturn. The pandemic provided one of the toughest imaginable operating environments for the student housing sector. As campuses were forced to close with the imposition of lockdowns, occupancy was impacted. UK market aggregate occupancy data is not available, but some of the major operators have provided figures. Student housing operator Unite reported that 88% of beds were leased in 2020/21 although 80% were physically occupied. An occupancy rate of 95%+ is expected for this academic year. Empiric, which accommodates a higher proportion of international students and have fewer nomination agreements with universities, reported that occupancy fell to 70% for the academic year 2020/21, although it has bounced back to 81% for 2021/22.

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Travel restrictions were less limiting across Continental Europe than they were for the UK and so occupancy was also more stable. Europe-wide room occupancy fell by around 10%1 and there were pockets of even greater resilience. This contrasts starkly with Australia, where international border closures were stricter and longer lasting than in most other parts of the world, so virtually no international students were able to gain entry. In the US, occupancy rates also demonstrated relative stability. Across a sample of 20 major operators, occupancy was at 88% in Q4 2020, down from 92% a year earlier, although it is quite possible it fell further in the intervening period. Occupancy was already back on an upward trajectory by Q1 2021. Interestingly, in the US we can also look at rent collection rates. This shows that student housing collections never fell below 94.5% and by late-2020 were back at c.97%. For context, US multifamily collection rates were 93-94% through this period.
In addition to immediate occupancy impacts, there were understandably fears that there would be sharp downturn in enrollment for coming years. These fears have not been realised.
Domestic demand again showed its tendency to rise in periods of economic uncertainty. Both application and acceptance rates for UK 18-year-olds achieved new records. The pandemic halted school exams and students in some countries were given centre assessed (or similar) grades. In the UK, this left a larger than usual proportion of school leavers with the grades needed for university, and the number of 18-year-olds going into higher education increased by 5% compared with 2019. In France, the entry success rate jumped to above 95% in 2020, from 88% in 2019. 

International students not deterred by pandemic

Perhaps more surprising is the strength of demand from international students. Rather than being deterred by the pandemic, UK applications and acceptances both increased sharply for the 2020/21 academic year. International enrollments reached their highest level on record. It is possible that the UK, and other European countries, have benefitted as other countries have taken a tougher stance on international students. 

Enrollment trends have not been universally positive across markets, but even where they have been weaker, they have not been disastrous. Provisional data for the US shows that undergraduate enrollment fell by 700,000, or 4%, between 2019 and 2020.2 In France, initial data3 shows around 90,000 international students submitted applications for the 2020/21 academic year compared with 100,000 the previous year. 
In the UK as we move on from the pandemic, we are left asking not whether student demand will recover, but rather whether the uncertainty-driven increase in demand can be maintained over coming years. Especially since unemployment has been contained far more successfully than initially feared and job vacancies are at record levels, both factors which could encourage more young people into the labour force.

UK domestic demographics to support demand for the next decade 

A record 40% of all 18-year-olds in the UK applied for a full-time undergraduate course in 2020/21, which combined with a higher proportion of applicants achieving their entry requirements meant enrollments also reached an all-time high as a proportion of the population, at 36%. As we move past the economic disruption caused by the pandemic and the economy continuing to enjoy a cyclical upswing, job prospects should further improve and a slight dip in application rates is likely.

However, over the long-term there is a clear upward trend in the participation rate which is unlikely to change. Although this upward trajectory cannot continue indefinitely and the level at which it will eventually plateau is unknown, it seems unlikely that this threshold will be reached over the coming decade. So, while a small dip in rates in the near term is quite possible, application rates of 40% or higher could easily become the norm over the next decade.

Even if the UK participation rate were to stagnate, domestic demographics are now shifting from headwind to tailwind. The Office for National Statistics (ONS) estimate that the UK’s 18-year-old population stood at 717,000 in 2020, its lowest level in 20 years and a decline of more than 10% from the 830,000 peak reached in 2009. 2020 marked the nadir though, and the UK’s 18-year-old population is now growing again. Growth is expected to continue throughout the 2020s until there are close to 900,000 18-year-olds in the UK by the early 2030s. Cross-checking with the United Nations (UN) projections confirms the strong outlook. This means the largest pool of demand for UK higher education will be growing by close to 2% p.a. over the coming decade. Clearly, this is an incredibly supportive backdrop for student accommodation.

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Sources: UCAS, ONS

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Sources: ONS, UN

Demographic Support Not Unique to the UK

The UK is actually not alone in seeing strong growth in younger age groups. Over the coming five years, many developed economies with established PBSA markets are set to see growth in the 18-year-old population. Modest (3% cumulative) growth in the US is expected to be enough to see enrolments set new records over the years to 2026. Growth will be even stronger in both Southern Europe (5%) and Northern Europe ex. UK (9%) over the coming five years. 

These markets vary from the UK in that supportive demographics begin to fade in around five years though, whereas in the UK they persist for a full decade. The same is true for Australia, which actually has the strongest growth projection for the coming 10 years of the selected markets shown in Figure 4. There are also exceptions to the positive outlook. In Japan, the 18-year-old population is projected to continue shrinking over the next decade, albeit at a reduced rate from the declines seen in recent years.

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Source: UN

Are domestic students a substitute for international students?

A growing pool of domestic demand is obviously a positive for the PBSA sector. However, a key question prompted by travel restrictions is to what extent is domestic demand really a substitute for international demand? International students are associated with higher rental rates. Typically, they have higher budgets, as the costs of studying abroad are higher than studying at home. It is commonly assumed that domestic students will be more price sensitive than international students and a survey conducted in the UK5 did show the single most important factor influencing where students live is value for money. Domestic students are likely to place less value on some of the key attributes of PBSA, such as more security in booking internationally and far in advance. Domestic students are also likely to be more able to negotiate finding accommodation in the private rented sector (PRS).

That said, evidence from the UK shows that students’ experience during the pandemic varied greatly depending on the type of accommodation they lived in. This uncertain period brought some of the benefits of high-quality professionally managed accommodation to the fore. 
More than ever, students and their parents are seeking safe, supportive and well-managed accommodation, which may encourage a larger group of domestic students to opt for PBSA.
Across Continental Europe, it is most common for domestic students to be living with parents or in shared accommodation. On average, only 17% of students in Europe live in PBSA5. This varies considerably by country, with c.30% of students in the Nordics living in PBSA but less than 5% of students in Italy. There are many reasons for the different housing situations of students: cultural, traditional, and institutional factors, housing availability and pricing, differences in terms of income, employment, parental support and family situation. Understanding these factors in a given market will be key in providing the most appropriate PBSA product. 
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Sources: Catella, HESA

It is also important to note that international students are not one homogenous group. The cases of Germany and Australia offer very different examples. A big part of Germany’s appeal to students from elsewhere in the EU is value for money, and many of these inbound students will be happy to navigate the quirks of a neighbouring country’s private rental housing sector.
In Australia, the distances travelled and the cultural differences are likely to be much greater for the inbound students, which is likely to encourage them towards the relative security of PBSA. 
Domestic demand can either be a partial substitute or a poor substitute for international demand, depending on the PBSA offering in question. The experience of the pandemic calls into question the logic of providing PBSA exclusively focused on international students, and providers are likely to rethink how accommodation can appeal to both groups. The imposition of travel restrictions put this issue at the forefront of PBSA owners and operators’ thinking. While it remains valid, in the absence of renewed and prolonged restrictions, we may actually be better returning to the pre-pandemic demand question; will the growth of international student flows continue?

Pool of internationally mobile students continues to grow

Globally, there are two clear demographic trends driving demand. Population growth and the increased wealth of that population. Population is the easiest of these trends to quantify. According to the UN, there are 122 million 18-year-olds in the world, which is 11 million more than there were at the turn of the century. Growth has been driven by the regions categorised as “less developed” by the UN. These regions now have almost 14 million more 18-year-olds than in 2000. The “more developed” regions now have 2.5 million fewer 18-year-olds over the same period. This also means that relevant population growth has been located in regions where the rates of participation in higher education are rising most dramatically. This has been driven by the rapid growth of the middle classes. World Data Lab report that each year 140 million people are joining the “middle classes”. 

Globally, the number of students studying outside of their home country exceeded 6 million in 2019. This represents growth of more than 30% over the previous five years and the number of international students was still below 3 million as recently as 2006. While on the face of it, it may seem unlikely that such strong growth can be maintained over the coming decade, population projections are supportive. The global population of 18-year-olds is set to grow more rapidly over the coming decade than over the preceding decade. The OECD forecasted (pre-pandemic) that the globally mobile student population could reach 8 million by 2025, a growth of 2 million from 2019. 

The distribution of growth over the next five years looks like something of an anomaly set in a longer-term context, with the 18-year-old populations of “less developed” and “more developed” regions increasing at a similar pace. Thereafter though, a more familiar pattern resumes with growth continuing across “less developed” regions but “more developed” regions projected to see declines. This is illustrated in Figure 6 and suggests that sooner or later, all developed markets will be increasingly reliant on international students to support demand. The timing though will vary from market to market.

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Sources: UN

Long-term outlook unchanged by the pandemic

Has the pandemic changed this outlook? Near-term, economic and particularly political uncertainties may influence where students choose to study. Travel restrictions or the risk of regulation changes mid-course could encourage more studying in home countries. Longer-term, the pandemic has not meaningfully changed the relevant population outlook. Admittedly, in many countries the pandemic has interrupted the upward trend in household incomes, with falls were recorded in 2020, but the upward trend is expected to resume from this year. This will continue to enable more and more students to be internationally mobile. 

China represents the largest mobile student population globally, according to UNESCO data. Just over 1 million Chinese students were studying abroad in 2019, 18% of the global total. The next largest group is the 460,000 students from India, 8% of the global total. No other country comes close to these contributions. The next group of countries consists of Vietnam, Germany, France, the US, South Korea and Nepal, and each contributing around 2% of the global total.

Remarkably, China has been dominating global student flows despite its 18-year-old population having been through a long phase of decline. However, this is now returning to growth, meaning China’s dominance looks sure to continue. The opposite is true of India. Here, there has been strong growth in those of higher education age over the past decade, but this will reverse over the coming decade. It is unlikely to stop the rise in student numbers though as under its ambitious National Education Policy, India wants half of all 18- to 21-year-olds enrolled in university by 2030. To meet that goal, India would need to achieve a doubling of enrollments over the coming decade. 

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High quality institutions will continue to attract international demand

The US is the single largest destination for internationally mobile students, attracting close to 1 million students from 76 countries in 2019. Australia and the UK are the next most popular destinations, each accommodating around half a million international students. Germany, Russia and Canada form the next group of destinations, each hosting around 300,000 international students. The quality and size of the higher education offering in a country is the single most important factor in that country’s ability to attract international students.6 Typically, this provision is correlated with the size of the economy, however there are exceptions. The UK, with 58 institutions in the top 500,7 has a far superior provision to many larger economies.

When we compare the inflows of international students to the total number of students in higher education in these markets, we can see that some markets are more dependent on international flows than others. Despite the US having the greatest absolute inflows by some margin, international students only accounted for 5% of the total student population in 2019, according to the OECD. The figure is similar in Russia. By contrast, in Australia international students were 28% of the total. The UK (18%), Canada (16%) and Germany (10%) fall between the two extremes.

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Sources: UNESCO, OECD

Narrow dependencies could prove a vulnerability


These figures clearly point to higher education institutions and student housing providers being far more reliant on international students in some countries than others. Whether this is a strength or weakness is open to debate. With the pandemic fresh in minds, this may immediately seem to be a vulnerability, for example, if new travel restrictions are imposed. Alternatively, a strong track record of attracting students from countries with the best prospects for exporting students going forward could be considered a key competitive advantage.
China and India have been big drivers of growth for the UK market. These inbound students appear less sensitive to cost and more sensitive to postgraduate opportunities. Not only does continued growth look most assured from these countries, but also the distance and cultural differences are likely to continue to steer these groups towards PBSA.
However, being heavily dependent on inflows from one or two specific countries does leave a market exposed to political or economic changes in those origin countries. Inflows spread between a broader base of countries would be preferable.

Improving provision in new markets is shifting international flows

It is sheer scale that makes China and India the biggest exporters of students since they both actually have relatively low outbound mobility ratios. Only 2% of total tertiary enrolment in China is overseas and for India, the figure is just 1%. This contrasts with rates of 6% for Vietnam or an extreme of 21% for Nepal. The Northern European markets of France and Germany both have outbound mobility rations of 4%, while the equivalent rate for the US is just 0.5%. The wide range in these rates point to factors beyond population growth and income levels that influence the international flows of students. The provision of quality higher education in home markets is clearly important, as is the proximity of alternative markets.

Improving provision in new markets, such as China, India and Malaysia, is one of the most significant global higher education trends of the past decade and has the potential to shift the historical pattern of international student flows. Many are seeing rapid increases in enrolments, building critical mass. Historically, students have gone overseas to study due to a lack of capacity or quality at home. This is now changing. For example, China now has ten institutions in the top 200 globally,8 up from just three a decade ago. 

Many of these universities are also internationalising quickly, largely by attracting students and academics from their own region. Intra-Asian mobility is on the rise as the continent develops its own high-quality education options and work opportunities. Over the past decade, Asian governments have launched initiatives and set ambitious targets to attract hundreds of thousands of foreign students. The affordability of Asian education also makes it appealing for students in the region. Even the most expensive options are on par with the UK and still far under what US colleges cost. 

Student migration to the West has not yet been dented by this trend and it seems that both trends can co-exist. High-quality education is easier to replicate than experience or cultural awareness. It does provide a warning for institutions in these countries though. As Asian students exercise greater scrutiny and have more choices, the social and economic recognition that once came from attending any Western university now only applies to the top universities in those countries.

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Sources: Times Higher Education

Many markets appear undersupplied

Moving on to consider supply, there is variation by county and city, but most markets still appear undersupplied. The UK is something of an exception in this regard. While by no means over-supplied, it is one of the most mature PBSA markets globally and so has a depth of stock that could only possibly be matched by the US. There are c.630,0009 rooms in the PBSA sector in the UK, split roughly 50-50 between private sector and university-provided accommodation. 

PBSA supply is typically described by provision rates, or the percentage of the total student population that could be accommodated by the private PBSA stock. In the UK this figure is 27%, showing the UK has four times as many students as it does private PBSA beds. Despite the relatively low figure, this is actually the highest provision rate in Europe or in any of the established markets globally. The only other European countries with provision rates of 20% or higher are Denmark and Sweden. Western European countries range from 15% in the Netherlands to 10% in Germany, while the rates are far lower in Southern Europe. In Italy, for example, less than 5% of the student population could be housed in the private PBSA stock. 

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Source: Catella 

There are variations within countries as well as between countries. The average provision rate across major European cities in continental Europe was 20% in 2019, and with growth in student numbers comfortably outpacing new construction this rate has been falling in recent years. Rome (3%), Porto (3.5%), Milan (4%) and Turin (4%) have some of the lowest provision rates in Europe. Spanish cities are also characterised by extremely low levels of supply, and provide a good example of how dynamics can vary between cities, as illustrated in Figure 10. By comparing provision rates including and excluding the development pipeline, we can also see how quickly these markets are changing.

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Source: Green Street

Australia has around 105,000 PBSA beds in total, which suggests a national provision rate of c.10%. The landscape is changing quickly though as almost 9,000 new PBSA beds were delivered in 2019 alone. The US is on a completely different scale, with c.20 million undergraduate students enrolled on degree courses and c.2.7 million PBSA beds. The implied national provision rate of 13.5% puts it broadly in line with the Western European average.

Provision should be considered in context of wider residential market 

Provision rates are a useful tool for comparing markets but should not be considered in isolation. Living in PBSA is not compulsory for students, who have other accommodation options in the wider residential market. Even in the UK, where provision rates are relatively high, the stock of PBSA units is tiny when compared to the total housing stock of c.30million homes or c.90 million bedrooms. This means that PBSA supply, occupancy and rents will not be completely independent of the wider rental market. For all the advantages of PBSA living, there will be a price that will cause switching into the mainstream rental market. This will limit the spread of rents between the two accommodation options, with the spread varying from market to market and likely being widest in the markets with the greatest density of international students. This means investors need to consider conditions in the wider rental market, as strong PBSA rental growth is unlikely in a city where PBSA rents are very high relative to mainstream residential rents and/or mainstream residential rents are falling.
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Undersupply supports rental growth

Limited supply meant that even in the disruption of 2020 many PBSA markets continued to record rental growth. Growth of 3.4% made London a relative laggard, compared to the 4.7% growth recorded in Paris or the 5.6% seen in Rome. However, comparing rents across markets is complicated by differing ownerships, specifications, and locations within cities. For example, the average cost of rent in Paris is lower than other major cities because the French market has a number of non-for-profit organisations running student accommodation, which has kept price inflation for PBSA low. In addition, the majority of PBSA in Paris is of average quality and located in peripheral neighbourhoods, rather than in the central districts. This contrasts with Dublin where PBSA locations are more central and the specification is higher, meaning a higher average rent.

Even in the UK, the availability of rent (and other performance) data is not as strong as for the traditional mainstream real estate sectors. Different sources look at different samples and in some of the most supplied regional cities, where provision rates could be 50%, there will be a high proportion of first-generation stock which no longer really competes with modern stock. As well as lacking the customer appeal of modern stock, this is often inefficient and expensive to operate. Figure 11 shows UK PBSA rental growth over the past five years, highlighting strong overall growth as well as significant variation by geography and asset quality.

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Source: PMA, CBRE
  

A significant replacement opportunity exists

In the UK, private sector involvement used to be limited with universities owning and running halls of residence. Now, almost half of residences are owned by private providers, working independently or alongside university partners. This has meant a dramatic improvement in the quality of stock being provided, which is an important support for the UK’s higher education market in attracting international students. 

Across much of Europe, this transformation is only in its early stages. There are similar market fundamentals underpinning the growth opportunity, but much existing accommodation is out-dated and unfit for purpose, owned by public organisations who are cash poor and not inclined or able to invest in improvements. In many European cities, the supply currently mainly consists of separate rooms with shared facilities which falls far short of the expectations of increasingly discerning international students.

In the US, the median age of university-owned student housing is approximately 50 years, representing a huge replacement opportunity. 
The pandemic has been a further catalyst for higher expectations, in particular increasing demand for healthier buildings. A similar flight to quality has been observed in Australia. As students have ever greater expectations of their time at university, student housing will need to evolve to stay relevant.

Consolidation in mature markets points to importance of scale

In the better supplied, more mature markets we see a trend of consolidation and major players dominating provision. As well as the efficiencies that come with scale, the importance of customer service and brand recognition are increasingly accepted. In the UK, the top two private sector owner/operators (Unite Students and iQ Student) operate just under a third of all private beds and nearly half of all nominated/leased beds. Operations are even more consolidated than ownership. The top 10 owners control 51% of private sector beds, whilst the top 10 operators control 59% of the private market.

The Australian market is similarly consolidated, with the top 10 owners controlling c.40,000 beds and the top 10 operators managing c.60,000 beds. This is 37% and 55% of the total number of beds respectively. There is more diversity in the US market, where no manager operates more than 5% of the national stock of beds. In 2020, there were 15 US operators managing 20,000 or more PBSA beds. There are relatively few established specialist operators across the Continental Europe. For example, in Spain the top landlord (RESA) operates just 11,000 beds compared to 70,000 beds in the UK (Unite). This points to a less mature market and also an opportunity to build a platform. 

A rapidly maturing global investment market

Looking at the PBSA stock showed the UK to be amongst the most mature markets globally, and a similar conclusion can be drawn from the investment market data. Over the past decade, student housing in the UK has moved from being an alternative asset class to an institutionally accepted part of the real estate investment market. Indeed, UK transactional activity in the sector was just £700 million in 2011, and since 2015 it has averaged £4.3 billion per year.

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Source: RCA

Within a global context, the UK is the second largest student housing market behind the US. The US accounted for 44% of all investment over the past five years, with the UK accounting for about a third of all transactions in the same time period. Australia, Spain, France and Germany are the next largest markets within this space, but all are still well behind in terms of market size and liquidity. The large European markets of France, Spain and Germany are still in their infancy, but although the wider European student housing market is still relatively illiquid, we have seen a significant pick up in investment over the past decade. 

Despite the severe operational impacts of travel restrictions and social distancing, investor appetite for student housing has not been dented by the pandemic. This is aligned with our assessment of counter-cyclical demand for higher education and strong demographic support for the global PBSA sector over the coming decade. Global PBSA investment volumes have held up remarkably well during the pandemic, falling only 3% in 2020 (compared to overall global volumes, which declined 17% year-on-year in the same time period) . Activity in the first nine months of 2021 has overtaken the amount transacted in the same period in 2019.

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Source: RCA

The active investor set continues to broaden and is very international with overseas capital accounting for just under 50% of all acquisitions globally in the past five years. The UK market is dominated by overseas buyers. Over the past five years, cross border capital has accounted for over 70% of all transactions, with large portfolio deals making up the bulk of these. Portfolio deals are an ever-increasing part of the investment market, as investors look to scale their acquisitions and bring down operational costs. In addition, increasingly it is the company/operator as well as the assets that are being acquired (platform deals), as investors look to bring in the skills required to operate at scale.

The paucity of large-scale operators in many European countries means platform deals are often priced at a premium due to their scarcity. Another avenue investors are pursuing are joint ventures with developers to source sites. Complications in sourcing stock are not deterring investor interest though. A recent European investor survey10 indicated that over a third of respondents were looking to enter new countries in the student housing sector, highlighting the attractiveness of many undersupplied European markets.

Weight of capital driving value growth

The weight of capital that has entered this sector over the past decade has put downward pressure on yields, especially the most prime locations. As measured by the RCA transaction-based cap rate, the average global PBSA yield has declined from c.7% in 2011 to 5.4% in Q3 2021. Admittedly, a similar trend has been observed for all commercial property over the same period, although student housing has seen slightly greater compression.

A similar pattern of yield compression is visible in the data for the UK specifically. However, here we also have more granularity. In 2010 all parts of the UK PBSA market offered above All Property average yields and there was little variation by PBSA segment. In 2021 more variation is apparent. Secondary PBSA stock has actually seen yields move out over the period as first-generation stock struggles to compete with newer, better specified, more operationally efficient assets. Central London PBSA assets, offering the deepest demand pool and greatest liquidity, have seen the greatest yield compression, and are now lower yielding than the All Property average. This highlights that location and asset quality become increasingly important performance differentiators as markets mature.

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Source: CBRE

Transaction data also allows us to look at how the price paid per unit has changed over time. In the UK, the median price per unit has increased by c.6% p.a. over the past decade. In the Eurozone, where the market is still maturing, growth has been in excess of 10% p.a. over the same period. The same data also shows that the spread of pricing between the top and bottom quartiles has widened over time, which points to the greater variety of stock as the market matures.

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Source: RCA

Attractive opportunities to suit different return and risk profiles

Based upon transaction data, the rates of capital growth referred to above may not be reflective of the wider market. Furthermore, it is certainly not realistic to assume these rates of growth will continue indefinitely. However, we do expect PBSA to continue to outperform the wider commercial property market. In the UK we include the PBSA sector in our formal property forecasts and are projecting a total return of 7.5% p.a. over the coming five years, comfortably outperforming the 5.5% p.a. expected for all commercial property in the UK.

A lack of market data in many of the smaller PBSA markets makes replicating formal forecasts more widely difficult. A look at the PBSA yields on offer across continental European markets suggests that even stronger returns could be expected though. Admittedly, these come with a higher risk profile as less mature markets have inferior transparency and liquidity. Globally, the PBSA sector now provides attractive opportunities to suit different return and risk profiles.

PBSA investments can also be structured with different levels of operational intensity. In a passive approach, a long lease with a higher education provider for a full PBSA block gives the landlord certainty but means only the fixed contractual income is received. Conversely, taking on operational management and letting individual rooms directly to individual students exposes the landlord to volatility in earnings. Assuming the operation is a going concern though, earnings should be in excess of a lease secured on the entire asset. With operational management being key to driving efficiencies and enhancing returns, it is understandable that many investors would want this control. Options between the two extremes also exist. All options can be managed directly, or a third-party property manager could be employed.

Technology is improving access to higher education

Looking for factors that could disrupt the broadly positive outlook at the global level, the most obvious candidate is the rise of online learning. This was already increasing in popularity, but the pandemic has accelerated the delivery of online learning and raised questions about the future of campus-based learning. In the US, the pandemic prompted a very dramatic increase in distance learning. In 2019, roughly a third of undergraduates studied some element of their course remotely, and less than half of this subset studied entirely remotely. In 2020, three quarters of undergraduates were studying some part of their course remotely, with almost two thirds of this subset studying exclusively online. Clearly the pandemic provided a very unique set of circumstances and we would expect much of this shift to be reversed as the necessity for remote learning recedes. However, some element of the shift may prove permanent. 

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Source: NCES, NC-SARA.

Students of online degrees aren’t tied down to specific locations, enjoy greater flexibility in how and when they learn, benefit from greater affordability, and are presented with a wider variety of degree options. The convenience of online courses often facilitates the studies of groups who could not otherwise attend university. For example, the limited research that has been done on the subject points to a significantly higher average student age. Whilst there will inevitably be some substitution, we believe that online courses will be primarily a tool for increasing access to higher education rather than being a true substitute for in-person higher education. 

Students undoubtedly value the holistic, immersive experience of university life, which remote learning cannot replicate. For international students, campus-based life means the ability to meet friends and network with potential employers as well as often bringing the benefits of stronger language skills and better cultural awareness. The perception that international students would be most likely to move to online learning because the cost savings would be greatest, misses that these students have the most to lose from missed experience and are typically the least cost-sensitive groups. 

Aside from the non-learning benefits of campus-based learning, the fact remains that the effectiveness of online learning as a substitute for in-person learning is still unproven. Employment outcomes are also a key driver of demand and employers do not view both options equally. While this remains the case the two offerings are not proper substitutes. We should remember though that online learning is still in its relative infancy. As it improves and perceptions change, it may become a bigger threat to in-person learning and so also student housing demand.
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Impacts of online learning will be uneven

Universities face ever-increasing expectations from students and an increasingly competitive recruitment market. This may lead to even greater tiering of institutions and some in the lower tiers may conclude that a focus on online learning is an appropriate strategy. For the higher tier institutions, where competition is more on the basis of experience than cost, student housing provision may actually become more important as a key part of a university’s proposition.

We can already see this unfolding in the UK. Student numbers at lower tariff universities have remained flat since 2012, while higher tariff institutions have seen numbers swell by 25% as students prioritise access to the highest quality courses available to them. The effect is likely to leave the lower tariff universities competing hard with one another, not least on price, which will put pressure on finances. It is these same institutions that are most likely to see online learning as a cost-effective alternative to in-person learning, thus decreasing the demand for local student accommodation. The higher tariff universities which compete on quality rather than price will not be able to pursue the same strategy. Increased student numbers concentrated amongst higher tariff universities will exacerbate the undersupply of student housing in these cities.

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Source: UCAS

In-person learning will also continue to evolve

It is expected that the structure, format, and delivery of higher education will continue to evolve globally, and there is much more to this evolution than in-person vs online debate. One such trend is the increase in “short-cycle” courses, which are courses in targeted areas of study which are shorter in time of study than a typical undergraduate or postgraduate degree. The growth of English Taught Programmes (ETPs) outside of English-speaking markets is another growth area for higher education providers. Another strategy we’ve seen from UK universities, largely in response to Brexit, is the development of satellite campuses in mainland Europe to diversify their offering and provide increasingly flexible options to staff and students.
The provision of supporting services, like accommodation, will need to adapt with the changing environment. Whether this is by offering more flexible tenancies, incorporating of further technologies to foster studying within residences, or increased collaboration with different types of university..

International demand is susceptible to policy changes

Higher education is susceptible to political risks and changes in government policy. Therefore, awareness of education funding, grants and subsidies available, student number caps, ability to look for work after studying, and the rhetoric around immigration policies are all key areas to understand. 

Fees are an important factor for international students to consider, although it appears there is far greater sensitivity to quality than cost. The three most popular destinations (US, UK, Australia) are all within the top five most expensive destinations (tuition plus living costs) but survey evidence11 shows that the parents of international students still believe these markets to represent the best value for money.

Cost is still relevant though. As a result of Brexit, the cost of studying in the UK has increased dramatically for EU students. Consequently, the number of EU students in the UK has been falling in recent years, even as the total number of students has grown. Other EU markets have benefitted from this redistribution of EU students no longer willing to pay to study in the UK. Changes to ruling parties, political priorities or even economic conditions can result in changing policy, such as visa rules. Indeed, many countries changed visa eligibility during the pandemic. Political tensions could see the US fall out of favour with Chinese students, potentially benefiting the UK and other European countries.

International students are also sensitive to the postgraduate opportunities available to them. The UK now grants a period of two years (three years if studying at PhD level) to stay in the UK to work, or look for work, after completing a degree. This positions the UK in line with the US and other destinations for international students, the impact of which is evident in the uptick in demand from both Chinese and Indian students. Many countries currently have policies which recognise the economic contribution made by international students, although government policy is always subject to change.

The asset-specifics are important too

It is clear that PBSA investors must consider national factors, from demographic projections to government policy. They must also understand the supply and demand dynamics at a city level and have confidence in the local institution(s). In many markets there is some uncertainty over the financial stability of higher education institutions. Cross-subsidisation from international student fees has become the norm but this model looks more vulnerable following the pandemic. Resilient universities are not wholly dependent on one cohort of students, rather providing attractive options for a range of learners across different levels, including undergraduate, postgraduate and research students.

With students becoming more discerning, PBSA assets need to have the right attributes both to attract tenants but also to support local institutions in providing a holistic university experience that is of a high standard. This is especially true in more mature markets where students have more choice and there is greater variety of supply. Understanding the target customer and tailoring an appropriate balance between amenity provision and pricing is key. 

Some of the consistently important asset attributes are:
  • Proximity to institution and city centre
  • Public transport connections within walking distance
  • Local amenity – shopping, eating out, culture, recreation
  • Specification customised to target group (and complementing local amenity)
  • Appropriate unit mix – studios, cluster flats etc
  • Consideration of affordability

Wellbeing in particular is gaining importance. Survey evidence12 points to high-quality accommodation being the number one factor influencing student wellbeing, so this will increasingly feature in the ESG agenda for investors. This is not necessarily correlated to scheme density, however. Data from the US13 shows that while lower density formats maintained higher occupancy rates through the pandemic, the same pattern was not apparent in leasing for 2021. This suggests the pandemic has done little to change format preferences.
student-housing-image-5

Conclusions

Continued growth in demand for international higher education, and so also professionally managed student accommodation, is well supported by the demographic outlook. For the UK, this is true both domestically and globally. Coming out of the pandemic, PBSA operators are likely to give more consideration to domestic students alongside international demand. In most markets this demand meets an undersupply of modern stock, creating the conditions for further value growth. We believe the disruption that will be caused by increased online learning is manageable and that the bigger risk to established PBSA markets is that international student flows are diverted by improved higher education provision in new markets.

We will likely see greater tiering of the international student market, with strong demand for the truly global “prestige” markets, such as the US and UK, as well as popular intra-regional destinations representing attractive value for money, such as Germany in Europe and China in Asia. This will provide strong support for PBSA in these locations, although assets will need to be tailored to the type of demand. There may also be a group of (weaker) institutions that more aggressively pursue online learning, which could put PBSA demand in absolute decline in those locations. Ultimately, there will be a wider range of prospects for demand within countries, across cities and institutions. The importance of strong institutions cannot be overstated as international students continue to become more discerning.

However, this targeted approach is complicated by the benefits of scale and operational efficiencies when investing in PBSA. In markets such as the US and UK, there are enough strong institutions for these two aims to be compatible, but this will not be the case everywhere. In Continental Europe, this may ultimately lead to regional rather than national operators/platforms.
As PBSA moves to the mainstream in some markets while it is less mature in others, the sector provides attractive opportunities to suit different return and risk profiles (as well as different operational intensities).
The UK, like the US, cannot match the returns on offer in less mature markets, but the combination of strong institutions, established operators and deep capital markets make them less risky. London is the most mature market in Europe, this means low yields but excellent visibility on operating metrics as well as strong liquidity. In less established markets transparency and liquidity can be hurdles to investment activity, but demand dynamics are equally compelling, there is less supply, and higher yields are on offer. 

Footnotes

1 Catella Research

2 InsideHigherEd

3 Ministry of Education

4 Knight Frank/UCAS Student Accommodation Survey 2021

5 Catella

6 Knight Frank 

7 Times Higher Education World University Rankings 2022

8 Times Higher Education World University Rankings 2022

9 HEPI

10 JLL EMEA Living Investor Survey 2021

11 HSBC: Value of Education - Springboard for success

12 Knight Frank/UCAS Student Accommodation Survey 2021

13 CBRE