Purpose built student accommodation (PBSA) in the UK is a fragmented market. There’s no IPD benchmark and only one listed company, Unite Group, with a demonstrable yield track record.
The majority of investors are private and consequently transparency is limited. With a portfolio now extending to 46,000 beds across the UK, we have historically used Unite’s portfolio as a proxy for the wider PBSA market.
Over the longer term, Unite’s portfolio yield has shown greater stability than other property sectors, weakening by a relatively muted 110bp through the GFC (5.7% to 6.8%) vs IPD all property which weakened 330bp (4.6% to 7.9%) and latterly, in the post-QE recovery, compressing 120bp to 5.5% (vs IPD all property -290bp to 5.0%). What this misses though is the 54 months (Dec 2009 to Jun 2014) when PBSA yields drifted along at 6.5%, which was broken only when the investment market awoke to the structural opportunity on offer. Having bubbled along at £2bn pa between 2011-2014, transaction volumes in 2015 nearly tripled to £5.5bn (c.25% of the market) as a number of portfolios were brought to the market and PBSA’s defensive growth characteristics and rental growth potential became more widely understood.
It is estimated that 85% of the sector is now owned by longer term investors. For operational landlords, scale is important and several investors have openly stated their intention of wanting to acquire further beds to drive economies of scale. Only two portfolios are currently on the market for a combined £700m and other opportunities to acquire scale, quickly, are few and far between. The three largest operators (Unite, Vero Group and Liberty Living) have a combined market share approaching 40%, excluding university-owned PBSA. Given the long lead-in times on developments, and we note Unite is the only operator with internal development skills, we would not be surprised to see further consolidation across the sector in the race to bulk up. However, having acquired scale, the next challenge for the (relatively) new entrants will be to build out an operational platform.
The UK development pipeline stands at around 30,000 beds pa for the next few years. When set against the existing number of corporate PBSA beds (0.2m), this may look high, but student numbers are rising at a faster pace. In 2015/16, the net increase in the student population was around 0.1m and looking forward, while the rate of growth is likely to slow, it should still annualise at around 50-60,000 through the three year cycle. In this context, it is difficult to see the >3x demand/supply imbalance being eroded in anything like the medium term.
As ever with property though, it’s all about location, location, location. As university enrolments become more differentiated and students become ever more discerning and demanding, growth cannot be taken for granted, and rental growth of 3.5-4.0% pa will only be achievable if you have properly configured assets in the right sub-markets.
Robert Duncan is head of UK real estate research at Numis