5 Considerations For Developers And Investors Looking At Student Accommodation In 2024
The UK’s purpose-built student accommodation market continues to be popular with investors. The sector attracted £2.5B of investment in the first half, up from £1.3B in the same period in 2023.
However, finding the right assets to acquire or develop isn’t easy. A lack of development opportunities in major cities is hampering the supply pipeline, and with construction costs and interest rates remaining high, the viability of some projects is being challenged. Investors and developers need to take the time to fully understand each market to make the best short- and long-term decisions, Aldermore Bank Commercial Director John Carter said.
Bisnow spoke to Carter about the top five considerations investors and developers of PBSA need to keep in mind in 2024 when identifying the best opportunities.
Repositioning First-Generation Stock
Aldermore is seeing a healthy level of activity in the repositioning of PBSA stock that might be a few decades old, especially as the cost of new developments is high, Carter said.
“There are a lot of first-generation and smaller PBSA blocks that met standards when they were built but now need to be upgraded to ensure the product is attractive to students,” he said. “Many operators are seeing this as an opportunity to acquire an asset at a good price and then increase the rent postrefurbishment. Clearly, they recognise there will be long-term demand in these locations.”
As these assets tend to be smaller in scale, they may not fit neatly into the portfolios of some investors. A larger operator might look for economies of scale, where they could bring costs down by managing larger blocks or as part of a bigger portfolio.
However, many of these older assets are in locations that are proven to appeal to investors looking to build a portfolio.
Take A Closer Look At The Data
When deciding where to invest in PBSA or which type of asset to build, there are more data points to refer to than ever before, Carter said. PBSA operators now collect information about the sorts of homes students want, including aspects such as amenities and environmental impact, which is increasingly influencing student choices.
“While it might cost more to develop a property tailored to what students are seeking, on the flip side, this will future-proof an asset,” Carter said. “PBSA is generally a long-term investment, and the better equipped assets are for the long term, the better the value will hold. It’s also likely you’ll achieve better rents if the asset is in a competitive market.”
In addition to looking closely at underlying supply-demand metrics, Aldermore seeks to support investors and developers of PBSA assets based on the business model, so it will look to understand how well they know the market they are targeting. Markets differ across the UK and depending on the types of students in that university, Carter said.
Consider Changing Student Demographics
An investor or developer can also use data to analyse changing student demographics. There are three types of PBSA assets they could create, Carter said: accommodation for the UK student market, the postgrad market or for international students.
The previous Conservative government had already made changes to the ability of international students to bring their families with them to study in the UK. This could impact demand from certain jurisdictions moving forward, as well as the finances of universities that rely heavily on income from international students.
“It’s well documented that some universities are more financially stretched,” Carter said. “Investors and developers may wish to assess factors such as a university’s reliance on international students to gain an insight into future demand for accommodation. If you understand the elements that are driving financial concern, you can quickly drill down to which ones are going to have more problems and the most appropriate asset to deliver.”
Make The Most Of Changes To Planning
The new Labour government has announced its intention to overhaul the planning system. This could provide new opportunities for the PBSA sector, Carter said.
“In cities with a particularly acute lack of PBSA, this impacts the residential sector, as it pushes rents up,” he said. “If planning can be accelerated to make sure the right assets are provided in the right place, this could help ease issues in both asset classes.”
Acceleration of planning should result in a lower cost of development as more opportunities arise and deliver faster, Carter said. This could impact future supply-demand dynamics, which an investor will need to be aware of.
Understand The Financial Landscape
While the UK is in a much more stable economic landscape compared to a year or two ago, there is still the potential for uncertainty. One factor yet to be fully understood is the impact of the abolition of multiple dwellings relief, which happened in June.
“It’s still early days, but we expect MDR to have some impact on the market moving forward,” Carter said. “It could reduce the value of assets if the purchase costs are higher, though that will depend on the quality and location of each asset and how efficient the management of the asset is viewed — and likelihood of rental growth.”
Aldermore has a broad understanding of all financial aspects of PBSA, as the bank operates as a one-stop shop, lending to developers through to operators, Carter said. By working with the right financial partner, an investor or developer with a sound business plan can make the most of PBSA opportunities.
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.
