Student Accommodation Might Be Considered Recession-Proof, But You Have To Develop The Right Product

As the UK grapples with high inflation and interest rates, real estate investors and developers are searching for more secure opportunities. One of their strongest options is the purpose-built student accommodation sector, Aldermore Bank Commercial Director John Carter said.

However, those looking to get into this sector need to understand each market's unique requirements and demand for PBSA properties. Bisnow spoke to Carter about the bank’s view on what an investor or developer needs to consider when breaking into this market. 

Bisnow: Why is Aldermore focusing on providing support for those investing and developing PBSA, among other asset classes?

Carter: While the UK isn’t officially in recession, we all know that interest rates have risen and there is further economic hardship on the way. We’re focusing on areas where we know we can continue to be consistent, so we don’t have to alter our strategies as the economy evolves. 

We’ve defined PBSA as one of those areas with the recession-resilient characteristics we’re looking for. The main factor behind this is the sector’s supply and demand metrics. 

There are 2.9 million students studying in the UK who need to have somewhere to live. While some will live at home, there are still considerably more students than there is PBSA. In 2022 there were just over 712,000 PBSA beds nationally and circa 144,000 PBSA beds in the pipeline. 

The percentage of 18-year-olds in the UK is set to increase over the next decade. If the same percentage of this group goes to university, the demand for PBSA is only going to increase. 

Bisnow: How do the accommodation needs and priorities of different students differ?

Carter: There are three definite subsets of students. UK undergraduates tend to prioritise value for money. They also value the student experience. You cannot underestimate the need for interaction with other people and access to support systems provided by the universities.

Postgraduate students are another group who also often want to live close to universities. While they still seek value, they may look for more comfortable accommodation.

Finally, international students tend to go to more selective universities and are willing to spend more on their accommodation if it is in a prime location. In cities such as London, they might spend upwards of £750 per week to stay in the right location. 

Although the pandemic impacted the number of international students, this segment of the market is still large. Education is a global business. While the U.S. is at the No. 1 spot for attracting international students, the UK is firmly in second place. 

Bisnow: How do these groups have a bearing on the PBSA that is needed?

Carter: Developers of PBSA need to really understand the different priorities of these groups. They need to assess what the demand is for each type of accommodation — whether it is students who share and prioritise value for money or students who want a higher level of service. 

Along with the price point, they need to understand what types of properties are needed. This could be studios, perhaps for international students, then units with two, three, four or more bedrooms to enable comfortable sharing. 

It’s not a case of "build it and they will come." It’s important to remember that students do have a choice. The PBSA sector faces competition from the residential sector. Where there isn’t PBSA that offers the right value, students will look to rent a shared house. 

Bisnow: Why might a student choose to live in a PBSA block rather than rent a shared house?

Carter: One of the appeals is the fixed cost, which includes bills. This provides clarity of spending for students who are conscious of money and reduces the complexity of living in a shared home. 

Parents also value the certainty of bills. Value for money is going to become more and more important, which can be protected with a fixed cost.

Bisnow: How does the PBSA model benefit developers?

Carter: Offering fixed costs provides certainty of income, which is an important factor for our borrowers. There is certainty that a new influx of students will arrive in September and will pay a fixed amount through the year.

PBSA owners often now include a "fair use" clause in rental contracts to protect themselves against overly high energy use, for example. If a student leaves a window open and the heating on, this could cause a spike. 

Bisnow: Has Aldermore backed many investors and developers in PBSA?

Carter: This is a growing area for us, and we have backed many operators that have good platforms to manage properties efficiently. We are looking to work with operators who understand the importance of creating the right PBSA in the right place. 

Aldermore Bank has provided many loans for PBSA across the country, from Exeter to Scotland. We recently provided loans totalling £20.9M to Study Inn Group for a 400-room, two-phase student accommodation development in Leeds city centre. The borrower identified an opportunity to develop its boutique student accommodation with a high level of amenities.

Essentially, we’re looking to offer a one-stop shop for borrowers. We can offer finance for development, construction and during operation to allow owners to season the income to build up the value. For the PBSA sector in particular, we provide funds to allow an operator to ensure an asset is ready for that crucial September period. 

This article was produced in collaboration between Aldermore Bank and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to studio@bisnow.com.