PBSA upgrades offer solid returns.


Over the past 12 months or so, it’s been hard to miss headlines about the plight of students struggling to secure accommodation.

Recent research shows that while the student population has risen by 400,000 since 2019, the number of student houses has fallen by 19,000 in the same period, according to Sky News. For students going into their first year – and their parents – the problem is adding to an already stressful time.

The supply shortage has been compounded by a rapidly shifting demographic student mix. In the past few years, efforts to drive up the proportion of university students from lower socio-economic backgrounds have coincided with a high-inflation environment that has hit young people’s spending power more than most.

In the student housing market, the results have been predictable and well publicised, with providers struggling to deliver enough affordable beds for students whose only means to pay their rent is via maintenance loans. The market is struggling to solve this significant problem in a way that is sustainable for investors. Inflation is also responsible for the market’s inability to tackle the growing shortage of available beds for students.

In recent years, developing more purpose-built student accommodation (PBSA) has been seen as the solution. But higher land prices and building costs, and a congested planning system, make this an increasingly unattractive option for investors and developers.

In previous years, a steady stream of wealthy overseas students willing to pay a premium for newer, better-serviced schemes meant a focus on new build could be rationalised from an investment standpoint. But with uncertainty about Brexit’s long-term impact and changing rules for overseas students, investors will need to seek alternatives that cater to a wider segment of the market.

It’s not just the availability of beds but the quality that is causing a headache for university asset managers, with much stock failing to live up to student expectations – and to basic modern standards of safety and energy efficiency. Universities have an increasing number of assets no longer fit for purpose and in desperate need of investment in environmental, social and governance (ESG) upgrades and the resolution of cladding issues.

This is where a new opportunity for investors is emerging. Addressing issues with existing PBSA is crucial to improving student experiences and providing an inflation-hedged alternative to faltering new-build development. The shifts in students’ socio-economic demographics look to be with us for the long term, so focusing on improving existing affordable assets and investing in the needs of students from a wider range of backgrounds is a strong alternative to investing in new build for private capital.

This, and the mature nature of the sector, means refurbished PBSA stands to deliver robust occupancy rates, high yields and a strong return on investment.

As with any asset that has not been invested in for a long time, initial capex and proactive management are needed to ensure it is an attractive, Energy Performance Certificate-compliant and safe proposition for students. But even when improvements are costed in, financial outlays can come in at well under what new-build options would cost. In keeping costs down, rents can also be kept at a more affordable rate, which should promote a more enjoyable experience for what can be a daunting first move away from home.

PBSA is evidently in need of investment. Diminishing new-build PBSA returns must not put investors off deploying capital in the sector at a time when solutions are needed. It is the responsibility of developers and asset managers to put forward solutions that, primarily, deliver for investors, but also alleviate pressure on students and universities. These goals do not need to be mutually exclusive. The most pragmatic and cost-effective solution, and the means to achieve this, is to focus on improving existing stock.

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