Increasing development expenses and a notable deceleration in new purpose-built student accommodation (PBSA) projects are making existing assets more attractive to institutional investors, according to insights from Blackstone. The investment management firm, known for its ownership of iQ Student Accommodation, asserts that the current market landscape is creating a more advantageous environment for the sector, as escalating replacement costs continue to restrict new supply.
Market Overview
During a recent conference in London, James Seppala, Chair of Blackstone Europe and Head of European Real Estate, expressed optimism about the market, stating that the investment manager is “about as positive as we have been in years” regarding its investment readiness. He elaborated on the situation, noting that supply has significantly decreased across various sectors, with replacement costs climbing approximately 50% compared to five or six years ago.
Challenges in New Developments
The challenges posed by escalating construction costs and more stringent funding conditions have hindered the rollout of new PBSA developments in numerous university towns. Despite a resilient demand for student accommodation, the ongoing imbalance between supply and demand continues to fortify the attractiveness of well-situated existing assets. Seppala pointed out that Blackstone is witnessing the ramifications of these conditions across its real estate holdings.
Revenue Impact
He stated, “We are seeing the effect of the fact that nobody’s built anything, and that it costs 50% more to build anything, in our ability to drive revenues across most sectors, most subsectors.” This underlines the urgent need for increased investment into the PBSA market to address the existing supply constraints.
Confidence in the UK Market
Seppala reaffirmed Blackstone’s confidence in the UK market, identifying Europe as one of the firm’s most active regions for investment over the previous three quarters. He attributed this heightened activity to the more pronounced shifts in rates within Europe compared to global markets, which have led to adjustments in values and created opportunities for investment.
According to him, “The UK will remain our number one or two market in Europe over the next five years in terms of capital deployment.” This indicates a robust commitment to investing in the UK PBSA market, which is likely to yield significant returns as the demand for student accommodation continues to outstrip supply.
Future Opportunities
While Seppala also highlighted potential in logistics, data centres, affordable housing, Build to Rent, and single-family housing (SFH), he emphasised that PBSA remains a crucial segment for Blackstone, reinforced by their ownership of iQ Student Accommodation. When asked about the predominant challenge in the residential market, Seppala provided a clear response.
Supply-Demand Dynamics
He remarked, “The huge issue in that sector, the really acute issue in the UK and elsewhere around the world… is a total lack of supply relative to the demand for that sector.” To effectively address this challenge, he stressed the importance of maximising the capital directed towards this sector, enabling developers to secure the necessary debt and equity capital to proceed with new projects.