Data from Investec has revealed investor appetite in the UK’s purpose-built student accommodation (PBSA) market has cooled amid ongoing market challenges, Property Week can reveal.

In its latest report on investor sentiment, Investec found that half (50%) of investors surveyed view the student accommodation market as appealing, down 10% from its 2023 survey.

Sentiment on the longer-term outlook has also worsened, with 46% of surveyed investors expecting PBSA to remain attractive over the next five years, down from 58% in 2023.

Less than half (42%) of investors polled said they are optimistic about student accommodation over the next five years. However, PBSA is viewed more positively than offices (20%), multi-family build-to-rent (38%), and distribution and logistics (40%).

Another 42% of investors said they are invested in PBSA and intend to maintain their exposure over the next five years, with another 30% considering investment.

Nearly three-quarters of investors (74%) cite construction cost inflation as the biggest obstacle to growth in non-owner-occupier residential real estate, followed by the higher interest rate environment at 70%.

Despite this fall in positive sentiment reported by Investec, last month, data from Knight Frank revealed that investment in the UK’s PBSA sector totalled £2.1bn in Q1 alone, marking a ‘capital-strong’ start to the year.

Jonathan Long, head of corporate real estate finance at Investec, said while investors are still drawn to the UK’s PBSA market, capital allocation is “is becoming more selective and is assessed against a more complex set of considerations”.

He added: “Factors such as affordability, policy risk, university quality, operator strength and the deliverability of new stock are influencing underwriting and investment decisions.

“At the same time, wider geopolitical uncertainty, including the conflict in the Middle East, has added further pressure to the macro-economic outlook, feeding into energy costs, inflation expectations and borrowing costs.

“While this does not appear to remove PBSA’s long-term demand drivers, it does reinforce institutional investors’ need for more disciplined asset selection and execution as yields have moved out in many areas. This is not a retreat, but a reset.”

Survey respondents also cited the Building Safety Act as a major hurdle, with 92% of investors saying it has had a negative impact on real estate strategies and operations.

The most commonly cited effects of the act are increased compliance-related costs, highlighted by 68% of investors, increased administrative and reporting obligations, at 60%, and extended project timelines cited by 54%.

Some 74% of investors have adjusted their strategies in response to the act, with almost half focusing on refurbishing and repositioning existing stock rather than new development.

Long added: “PBSA demand remains strong in the right locations, but investors are becoming more disciplined about where that demand can support viable delivery. The strongest markets are those with sustainable rents, deep student demand and a cost base that justifies the delivery of new stock.”