PBSA supply crisis looming in the UK

Investors worldwide have set their sights on the UK's purpose-built student accommodation (PBSA) sector because there's a combination of soaring student numbers and a scarcity of supply, Savills report.

The real estate firm says the demand is fuelling remarkable rental performance.

Anticipated projections indicate a steady surge in first-year undergraduate students, with applications expected to hit the one million mark by 2030.

The latest data from Higher Education Statistics Agency (HESA) unveils that 628,725 full-time, first-year students embarked on their undergraduate journey in 2021/22 academic year.

That's the second consecutive year that more than 600,000 students have headed to university.

Overwhelming surge of international students

While Brexit led to a decline in EU student numbers, the void has been swiftly filled by an overwhelming surge of international students, mainly from India and China.

And the interest means the UK retains its coveted status as a global destination for students seeking an exceptional overseas educational experience.

Savills says that from 2019/20 to 2021/22 there was a surge of 117,500 full-time international students.

But the increase in student numbers coincides with a decline in Houses in Multiple Occupation (HMOs) that are available as landlords leave the student accommodation sector.

And decline in numbers is creating compelling opportunities for PBSA operators and investors.

'Over 300,000 buy-to-let mortgage redemptions across the UK'

In its 'UK Purpose-Built Student Accommodation Spotlight' report, Savills reports: "Since 2017, there have been over 300,000 buy-to-let mortgage redemptions across the UK, as regulation and tax changes have made investment less attractive for private landlords.

"As a result, there are currently 31% fewer 5+ bed properties listed for rent in Q1 2023 compared with the pre-pandemic average.

"This is creating supply shortages for students and leading even more of them to look to PBSA."

It adds: "As a result, occupancy levels are at record highs, supporting rental growth and expected to drive continued strong investment returns over the coming years."

Consequence of private sector landlords leaving

The main consequence of private sector landlords leaving is that the occupancy levels in PBSA units have reached unprecedented heights, boosting rental growth and delivering lucrative investment returns in the coming years.

In addition, shrinking supply and an expanding student population have ignited impressive rental growth - highlighted by a 5% increase reported by PBSA-provider Empiric last year.

Both Empiric and fellow student home firm Unite are predicting rental growth of approximately 7% across their portfolios.

And Savills says that in a market grappling with severe supply-demand imbalances, it is predicting PBSA rental growth rates higher than 7%.

Construction costs have skyrocketed

It's not all good news for PBSA providers, however, with Savills highlighting that over the past two years, construction costs have skyrocketed, peaking at nearly 10% in 2022 and placing substantial pressure on project feasibility.

The latest projections from BCIS and various quantity surveyors provide a glimmer of hope, indicating that the worst of the price hikes have passed.

But tender price inflation is forecasted to recede to a modest 2-3% per annum for 2023 and 2024 - which is another reason that the outlook for PBSA is, currently, upbeat.

Trading report from Empiric Student Property

To underline the strength of the PBSA, a recent business and trading report from Empiric Student Property reveals that the revenue occupancy for the 2023/24 academic year has soared to an impressive 86%.

That's much higher than seen last year and the firm says that rent growth this year will be 7% - the best rebooking campaign yet.

Empiric's chief executive, Duncan Garrood, said: "The booking cycle for the academic year 2023/24 continues to track significantly ahead of 2022/23, which was itself a record year for the company.

"We remain confident in achieving occupancy rates above 97% and pleasingly, delivering rental growth in excess of 7% like for like, ahead of earlier guidance."

He added: "The business is in great shape, our net promoter scores continue to improve, and we are optimistic that 2023 will be another strong year for the company."