Many of the contents of this article were originally raised at a seminar and panel discussion event entitled ‘Chasing value in PBSA’, hosted by Lockton Global Real Estate & Construction on Wednesday 18th October.
Purpose-built student accommodation (PBSA) remains a strong investment opportunity in Europe. Yet, PBSA developments are not without their challenges, whether from macroeconomic factors, or the changing needs of residents. Understanding these challenges, and being proactive in risk mitigation, offers the best route for long-term viability.
The resilience of PBSA
It is an uncertain time for the real estate market. Record levels of inflation across much of the globe have called time on decades of low interest rates. At the same time, geopolitical conflicts in Europe and beyond are driving economic volatility. Although transactions within real estate continue, 2023 has so far lacked the headline-making moves of the years prior, with few signs of change.
Despite these challenges, opportunities continue to present themselves for real estate developers. PBSA is one category that has proved its resilience in recent years, with a healthy excess of demand making for a typically reliable investment. A dynamic market, PBSA developments also carry an annual influx of new tenants, presenting developers and owners with an opportunity to reset rents regularly. Needless to say, this represents a major asset amid the current inflationary climate.
Looking ahead, signs for PBSA are positive. Demand is poised to remain high; in the UK, the Universities and Colleges Admissions Service (UCAS) predicts more than 1 million higher education applications (opens a new window) in 2030, up from three-quarters of a million in 2022. The shortfall of student accommodation, meanwhile, could rise to 600,000 by 2026 (opens a new window), according to student data property provider StuRents. This is good news for existing operators, and a potential window of opportunity for investors.
Risks for PBSA developers
Despite the robust demand, PBSA is not without its challenges for developers. In the UK, although rents are trending upwards, increases have not been sharp enough to cover post-pandemic inflation in the price of construction materials, nor the high costs for labour. Anticipated corrections to land value are yet to take effect. As a result, margins are tighter than often preferred.
To avoid these difficulties, developers are increasingly targeting European markets, which enjoy fewer supply chain constraints, cheaper land, and more substantial rental increases. European nations also enjoy healthy demand, with Irish, Portuguese, and Dutch universities among those to profit from the UK’s exit from the European Union, by targeting wealthy international students. Nevertheless, dealing in these relatively nascent markets brings challenges of its own. Local municipalities can prove to be complex negotiating parties, with a lack of planning permission a cause of frequent project delays.
These are not the only threats to viability. From a risk perspective, there are a host of issues that could pose a risk to a PBSA development, including:
Escape of water
Contractor insolvency and supply chain instability
Retention of existing structures
Changes to fire and safety legislation (e.g. the Building Safety Act (opens a new window) in the UK)
Understanding ‘people-oriented’ development
Another factor influencing the PBSA market in recent years is the so-called ‘flight to quality’ observed among residents. In practice, this has manifested in slowing demand outside of top-tier universities, as students become more selective in where they choose to live and study.
In parallel, residents are demonstrating increased appetite for a personalised living experience. Favoured developments typically include smaller footprints and fewer overall units, and may be clustered in a single location to replicate a traditional university campus. Although these projects bring heightened costs for developers, it is one for which residents are willing to pay a premium.
Meeting residents’ needs within the building is also key. In particular, a strong focus on student mental health needs has increase demand for areas and amenities to encourage interaction and build tight-knit communities. Specialist environments, such as developments exclusively for postgraduates, or those with space for a partner, are also in high demand. Developers who foreground these considerations within their development strategy can be said to have adopted a ‘people-oriented’ approach to business, defined by enhanced operational responsibilities.
Other considerations are important to bear in mind, such as actions on environmental, social and governance (ESG) issues. Evidence suggests that this isn’t a key factor in the decision-making process, with the majority of residents assuming that action is being taken. That said, poor performance against ESG criteria can generate negative brand repercussions.
Key considerations for PBSA viability:
Engaging customers and building partners – issues will inevitably arise during the construction process; the question is whether they can be resolved effectively
Tightening the supply chain – prioritise suppliers who demonstrate financial solvency and robust operation, and who can deliver quality and certainty
Staff resourcing – ensure employees have the capacity required to secure compliance with legislation, and that they are kept familiar with changing obligations
Leveraging effective planning where possible – many cities are keen to see office blocks and heritage buildings restored and repurposed, while suburban brownfield sites may meet more resistance
Seek out efficiencies – for instance, repurposing can avoid the need to pour new concrete or forge steel, also bringing environmental benefits; by contrast, repurposed assets may need upgrading to comply with environmental efficiency and safety standards
Maintaining dialogue with authorities – this may enable offsetting of unexpected costs, such as by increasing density, or adding an extra floor
For more information, please visit our Real Estate and Construction (opens a new window) page, or contact:
Sarah Penlington, Senior Vice President, Lockton Global Real Estate & Construction
Peter Chesterfied, Senior Vice President, Lockton Global Real Estate & Construction