The United Kingdom stands as a prominent global leader in higher education, boasting several of the world’s highest-ranking universities. In 2019, four UK institutions were listed among the world’s top ten, placing the UK just behind the United States in terms of the concentration of elite universities. The distinctive appeal and popularity of UK universities have catalysed an unprecedented demand for purpose-built student accommodation (PBSA). This sector has rapidly evolved into a dynamic and integral part of the UK’s investible property landscape in recent years, with two Real Estate Investment Trusts (REITs) playing a pivotal role.
Growth of the PBSA Sector
The purpose-built student accommodation sub-sector was effectively established by Unite Group nearly three decades ago. Prior to Unite’s inception, students primarily depended on converted houses or flats for their housing needs during their studies. Since its founding, Unite has grown to become the largest REIT in this specialised field, managing a substantial portfolio comprising 75,000 beds across the UK, with assets valued at over £7 billion. Today, the overall value of purpose-built student accommodation in the UK stands at approximately £50 billion. As domestic and international student numbers continue to rise, particularly with a notable increase in applications from countries such as China, the demand for adequate accommodation to house these students follows suit.
Supply and Demand Imbalances
The ongoing and escalating need for accommodation to support around 1.8 million students engaged in full-time higher education in the UK often results in demand surpassing the available supply of beds, especially in densely populated university cities such as London, Bristol, and Brighton. There exists a growing disparity in investment returns between cities facing a shortage of student housing due to restrictive planning measures and those with more lenient regulations. The severe lack of accommodation in London and the South East means that these areas remain significantly behind the UK average in terms of beds per student. This region is home to over a quarter of the total student population in the UK, with a third of all international students opting to study there, resulting in a pronounced imbalance where demand far exceeds supply.
Investment Opportunities in PBSA
The recently launched VT Gravis UK Listed Property Fund (GULP) aims to invest in REITs that are exposed to this robust and expanding sector. The fund seeks to capitalise on the existing supply and demand discrepancies, particularly in key locations where student accommodation is most required.
This undersupply is expected to be exacerbated by the slowing pace of new student accommodation developments, a trend that highlights London as a primary focus for investment funds such as GCP Student Living. This fund holds the distinction of being the UK’s first dedicated student accommodation REIT listed on the London Stock Exchange and has reached a market capitalisation exceeding £700 million.
Dependable Investment Returns
Focusing on expert exposure to student accommodation, as provided by entities like GCP Student or its larger counterpart Unite, can yield reliable dividends and capital appreciation for investment portfolios. The student accommodation sector is also less susceptible to the fluctuations of economic cycles compared to many other property sectors, making it an attractive option for investors.
When considering investment opportunities, it is crucial to identify companies that both own and operate these purpose-built student blocks. Some firms and funds may only possess the assets without actively managing the operations and tenant relationships. The most promising opportunities lie with the owner-operators who enhance the student experience by managing every aspect, from rental agreements and cleaning services to security and pastoral care.
Unite’s Strategy
As the pioneering entity in the ‘owner-operator’ model, Unite has established its brand by acquiring assets and maintaining high occupancy rates, ensuring a steady influx of students. The company effectively manages its student accommodation blocks, boasting occupancy levels that are consistently high, with approximately 60% of this occupancy supported by nomination agreements. These agreements see universities commit to using specific blocks of accommodation solely for their students, securing income for a predetermined duration, typically spanning several years. Such arrangements create significant barriers to entry for other players in the student letting market, reinforcing Unite’s long-term business model.
Partnerships in PBSA Management
While GCP Student does not operate accommodation directly, it collaborates with Scape, a reputable operator of high-quality purpose-built student accommodation, primarily located in London and the South. By engaging in the operational aspect of accommodation management, larger players such as GCP Student can leverage a trusted brand known for providing safe, high-quality, and purpose-built housing.
Government Support and Future Prospects
Crucially, the trajectory of government policy is markedly supportive of the PBSA sector. The International Education Strategy aims to augment the number of international students in the UK by over 30% by 2030. Furthermore, Prime Minister Boris Johnson has announced initiatives allowing international students to remain in the UK for two years post-graduation to secure employment, thereby enhancing the UK’s appeal to overseas students seeking to establish their careers here.
Despite uncertainty stemming from major events like Brexit, we believe that demand from students outside the European Union remains robust. The allure and calibre of UK universities continue to attract international students. For instance, the demographic of international students residing in GCP Student properties predominantly hails from countries beyond the EU, accounting for 69%. In contrast, only 13% were from EU nations in 2018.
Investing in purpose-built student accommodation provides an exciting and dynamic addition to an investment portfolio, offering crucial diversification benefits through exposure to assets that are largely insulated from the fluctuations of economic market cycles. With a strong pipeline of interest from international students and increasing governmental backing, the sector is poised for substantial growth. The most lucrative and high-quality opportunities are likely to be found in regions where demand persistently outstrips the available supply.
Author: Matthew Norris CFA, Head of Real Estate Securities, Gravis
1 Knight Frank Research
2 Gov.uk
3 GCP Student September 2019 Factsheet
This is a Gravis Paid Post. The news and editorial staff of the Financial Times had no role in its preparation.