Buyers Get Scientific On Student Accommodation To Avoid Exposure To Struggling Universities

The last academic year was a boom time for student accommodation providers, with rents rising nearly 10%. But with a slowdown in student numbers and more than a third of universities predicted to be in the red this year, investors and developers are having to become increasingly choosy over where they buy and build. 

“There’s been a lot of noise around universities’ financial health,” KKR principal Katherine Robertson told an audience of more than 200 at Bisnow’s UK Student Accommodation Summit, held at the University of Chicago Booth School of Business in the City of London. 

“The sector can’t be underwritten in a homogeneous way. You have to look in detail about the institution you’re exposed to.” 

There is still broad faith in the sector, with participation in higher education on the rise globally and UK universities ranking highly in that mix. Yet investors are showing more caution in their attitude following a couple of years of across-the-board soaring rent due to a postpandemic bounce in student numbers. 

This year, those numbers are in decline. Applications from domestic students are down 6%, according to data from the Universities and Colleges Admissions Service. UK government data indicates that student visa applications between January and July this year were down 16% on the same period last year. 

The change in the number of international students studying in the UK is a big worry for those operating in the student accommodation sector. Those coming from overseas account for 69% of residents in London purpose-built student accommodation and more than 55% in most UK cities. 

Limitations on family members joining postgraduate students and potential changes to rules on whether students can stay and work after studying in the UK have been forefront in the minds of investors and developers.

The jury is still out on the potential impact.

“Visa data is showing that the great unwind in foreign students applications, especially from India, isn’t as bad as people had feared,” Robertson said. “But you can’t expect exponential growth.”

As far as the financial health of universities, inflation has caused costs to rise, but a cap on tuition fees means income has remained flat and could fall if student numbers decline. About 40% of UK universities are likely to operate at a loss this year as a result, according to a report in the spring from the Office for Students. 

At the global macro level, things look rosy. The global student population is around 230 million, GSA Transactions Director Rob Waterhouse said, a number that is expected to grow to more than 260 million by the end of the decade. 

London as a city looks well positioned, being the only city with five universities in the global top 250 ranking. 

But at the micro level of what asset to buy or build and which cities and universities to align with, the situation is more challenging than it has been in some time. 

“There’s a real divergence now between the haves and have-nots, and it’s getting more challenging for those lower down the table,” Harrison Street Managing Director and Head of Asset Management Ben Chittick said.

Chittick said investors are focusing more and more on locations close to Russell Group universities, a group of older, established universities that typically have better rates of employment for departing students. They are particularly honing in on cities with more than one university.

“That’s not to say you can’t make money in those other markets, but you have to roll your sleeves up and be scientific about where you’re going,” he said. 

There is a place in a diversified portfolio of student accommodation assets for schemes in cities that have a higher proportion of domestic rather than foreign students, Apollo Global Management principal Madalena Contreras said. The occupancy of such assets have often proved resilient. 

“But coming at it from an investment perspective, the question is, how do you price that?” she said. “And who will buy it from you?”

KKR’s Robertson said investors are diving into the data about course offerings and student acceptances at individual universities, looking at whether they have strong recruitment of international students or need to dip into the pool of students not receiving an offer from their first choice to fill places.

Even if an investor picks the right city in the right university, it is not a slam dunk to assume money will be made in the current market.

“At ground level and operations, you can get it wrong,” Chittick said. “So we focus a lot working with our managers and our operating partners on the business plan, on marketing, on utilities, everything that we can look at in the middle of the income statement that's going to drive us a little bit more market value.”