UK Student Accommodation Rents Are Soaring. That’s A Blessing And A Danger

Investors and lenders continue to favour the student accommodation sector because the imbalance between supply and demand means rents can keep pace with inflation. But that same rental growth risks making the sector unaffordable for students and poses risks if it continues unabated. 

Amid persistent inflation of 8% or more in the UK, purpose-built student accommodation offers a haven for investors due to the ability to reset rents annually, while high demand means that income growth can outpace inflation, panellists said at Bisnow’s Continued Boom of Student Housing event, held at the Barbican Centre in London.

“The sector is seen as a good hedge for inflation, and I think that’s right,” Aldermore Commercial Director John Carter said. 

Carter pointed to a trading update earlier this month from Unite, the largest owner of student accommodation in the UK, showing the company expected its rents to grow by 7% in the 2023-24 academic year and its occupancy to be 98%. 

That level of rental growth gave lenders comfort when providing debt to the sector, he said, because even in a world of much higher interest rates, there is greater certainty income will cover interest payments. 

But no sector has escaped the cuts to investment volumes created by rising interest rates. About £1.13B was invested in UK student accommodation in the first half of the year, data from JLL showed, a 67% drop from £3.2B in the first half of 2022. Of that, £1B came in the second quarter, JLL said. 

Investors remain interested in the sector but must look to the long term or already have significant scale to find value, attendees heard. 

“We've been fairly active this year where others might not have been on the investment side. We've done a handful of transactions,” Blackstone Managing Director James Rosenfeld said. “In a challenging macro environment like this, our view is that you don't wait for the green light to start investing. You get conviction in the themes and the fundamentals in the sector, you form your own view, and then you go.”

Factors to consider include the supply of existing and new space coming through compared with demand, which remains favourable, Rosenfeld said.

Deals Blackstone has undertaken this year include a £160M forward funding of a new 1,209-bed scheme being built by Topland and McLaren Property near the University of Warwick. Blackstone owns the 30,000-bed iQ Student Accommodation platform in the UK, and Rosenfeld said it had also been buying individual assets for the company in nontraditional locations. 

“I think the overarching point I would make is that as an investor, you don't always have to be looking for the best price Day One. You often need to find the upside where others don't see it,” he said. “So for some of our recent acquisitions, we've been looking at locations which today might not be considered core, but we think there's a path ultimately for those locations to improve or become core.”

But those rising rents challenge the sector's affordability and risk creating a situation where owners and operators are dependent on certain groups of students for income, a concentration that inevitably creates more risk. 

“Affordability is certainly a concern. It’s hard to bet on a 10% growth rate every year in the coming years,” TPG Real Estate Vice President Maria Terzini said. 

“It can’t be price-inelastic forever,” JLL consultant Philip Hillman added, pointing to the reliance on international students, not just for student accommodation but for the UK higher education system more generally. 

The UK's student accommodation sector is one of the best in the world, he said, and should continue to attract students from overseas. But universities and accommodation owners make a big proportion of their profits from these students because prices for domestic undergraduates are fixed.

That is a business model that can be disrupted by exogenous events, as demonstrated by the pandemic. 

“So we've had Covid, war in Ukraine. Taiwan, is something going to happen there?” Hillman said in an opening presentation. “What will be the impact on Chinese students if there are issues around that? UK universities are worryingly reliant on international students. Also, will we see international students being a little bit more price-conscious?”

The counterpoint from Aldermore’s Carter was that as the middle classes grow around the world, new markets will open and be attracted to UK universities. 

For now, though, for good assets in good locations, the picture looks rosy. 

“Given that supply-demand imbalance, it's hard to see how rents are not going to continue to rise in the short to medium term,” GSA Global Head of Capital Markets John Jacobs said. “Yes, affordability is a very key issue. But the demand is so striking at the moment, it's very hard to see how that's not going to continue.”