PBSA: Key risks, and why we’re comfortable

Purpose-Built Student Accommodation (PBSA) is currently the UK’s fastest-growing property sector, attracting institutional investors from across the globe. Income is reliable, and it’s demonstrated stability as an asset class throughout economic cycles. However, as with any investment, there are risks to consider.

Read on to find out what potential risks there are, and why we’re comfortable with them.
 

What are the key risks?
 

Risk: The student population falls

Why we’re comfortable:

Overall student numbers are similar now to 10 years ago but applications per available place have increased substantially. Total acceptance rate stood at 74.5% of applications on 2016, leaving a substantial buffer for universities should numbers fall. This demonstrates the huge appeal of UK higher education among domestic and foreign students, providing a substantial buffer in the event that demand for a UK higher education should fall on a macro level.

More specifically, above average demand for courses at the most popular universities, means lower profile institutions are likely to bear the brunt of any potential fall in overall student numbers, according to the latest EY PBSA report. We will not be choosing PBSA around lower profile universities.
 

Risk: Brexit reduces the number of foreign students

Why we’re comfortable:

According to the Savills 2017 Spotlight Student Housing report, while Brexit may affect universities’ ability to secure valuable overseas students, the falling value of sterling makes the UK more attractive to international investors and students. Investors transacted over £2.1 billion after the referendum, compared to £1.9 billion in the earlier part of the year. In a similar vein, students may look to secure a world-class education for better value.

In addition to this, international students made up just under 23% of the full-time student population in 2016, 72% of which were from outside the EU. With this in mind, and considering just how much demand for PBSA outstrips supply, we are more than comfortable with any potential hit to EU student numbers. Savills forecast international student numbers to rise by 6% per year over the next three years.
 

Risk: There’s an economic downturn

Why we’re comfortable:

Student numbers increased during the economic downturn of 2008, demonstrating the counter cyclical trait for more people to study when the job market contracts, potentially offering downside protection in the event of an economic downturn. Furthermore, data from Lasalle Investment management shows that rental growth for PBSA continued at 3%-4% per year during the financial crisis, while rental values fell sharply in the wider commercial property market between 2007 and 2010.
 

Risk: There’s an oversupply of PBSA and demand falls among students

Why we’re comfortable:

To date, the market for PBSA has been characterised by a shortage of supply, with students showing increasing appetite for high quality, modern, secure accommodation. While builders cannot be relied upon to stop building before excess supply is created, we remain confident that numerous locations exist, which are home to a high quality university and an excess demand for PBSA.

The potential for demand to fall in the future can be mitigated by investing in locations which have a general shortage of housing and high private rental prices, increasing the cost and limiting the options for students outside of PBSA. On the contrary, investment into areas with weaker local economies and housing markets could increase the risk to future income streams without material enhancement to projected performance.
 

Risk: Demand from investors reduces

Why we’re comfortable:

Ultimately, the value of a property depends on what a potential buyer is prepared to pay for it. If investors appetite to invest in UK PBSA reduces, this is likely to have an impact on value. As described, we are confident that the prospects of the UK higher education sector and PBSA are strong, particularly in areas with high quality universities and strong housing markets. With the asset class priced off its income yield, the ability of PBSA to deliver sustained rental growth, feeding into capital appreciation looks set to continue. The characteristics of a high income yield and stable capital growth, will remain an attractive prospect for investors into the future, as interest rates are forecast to remain low relative to historical levels, and investors seek to diversify from more volatile asset classes such as equities and commercial property. To learn more about the advantages of PBSA as an investment, click below.
 

 

Sources:

  • JLL UK Student Housing Bulletin Q2 2017 http://www.jll.co.uk/united-kingdom/en-gb/Documents/property-sectors/alternative-investments/UK-Student-Housing-Bulletin-Q2-2017.pdf
  • Savills Spotlight: World Student Housing Report 2014
  • Knight Frank Student Market Review 2016
  • Cushman & Wakefield UK Student Accommodation Report 2016/17
  • Savills Spotlight: UK Student Housing 2017
  • CBRE student accommodation total return index, 2016
  • Lasalle Investment Management, Student Accommodation in the UK, September 2014
  • http://www.migrationobservatory.ox.ac.uk/resources/briefings/non-european-student-migration-to-the-uk/

 

Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Forecasts are not a reliable indicator of future performance. Gross rent, dividends and capital growth may be lower than estimated. 5 yearly exit protection or exit on platform subject to price & demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Financial promotion by London House Exchange Limited (8820870); authorised and regulated by the Financial Conduct Authority (No. 613499).