student housing

Could investing in new student housing and accommodation properties be an alternative in the current housing market?

From Liverpool to Newcastle and now London, a shortage of beds for university students has become another issue adding to the shortage of housing in the capital and beyond. London now ranks as the world’s largest market for students with full-time students at 300,000 and a quarter of all international students in the UK located at four London universities.

Lack of Supply

In a recent Jones Lang LaSalle (JLL) report on the situation, the supply of ‘purpose built student accommodation’ (PBSA) in the capital is now 88,950 beds, which is lower than the national average. In the past decade 49,300 new beds have been matched by 48,240 extra full time students in London.

The report cites that PBSA housing construction has been in decline with Zone 1 development falling from 6,888 beds in 2014 and 2015 to 1,519 beds for 2017 and 2018.

JLL reports:

‘High development costs and restrictive planning policy have forced investors to look at more peripheral locations in Zones 2 and 3 outwards. The 3,000 new beds delivered for the 2017/18 academic year is the lowest in more than a decade and the outlook is unlikely to improve. So far, there have been no major applications in Zone 1 in 2017.’

For the 2017/18 academic year the total of available beds in London will be at 88,950 this reflects a 125% increase since the 2007 – 2008 when bed availability was at 39,585.

Much of the increase over this period has been due to private operators which has accounted for 90% of the new beds.

‘Direct let (33,669 beds) and privately owned university agreements (18,152 beds) now account for 58% of all supply, up from 18% in 2007/8.’


Despite attempts to keep pace, the London market is still undersupplied by 34,500 beds, with universities turning to private operators to provide housing. Universities try to use guarantees of housing for students as part of the decision making process for parents.

JLL states: ’We estimate that two thirds of existing university beds are more than 17 years old and many are likely to be in need of modernisation. The last few years have seen a number of rent protests for university accommodation over a perceived lack of value for money, reflecting how student demands have changed.’

The undersupply problem is expected to continue as new construction of student housing has slowed with new bed supply expected to be 3,000. This would be the lowest rate of new beds per year in a decade and half of what was produced for 2014 and 2015.

For Central London, Zone 1, hopes for new PBSA is expected to diminish despite the approval and construction of 6,888 beds for 2014 and 2015 which accounted for 36% of the areas development. For this academic year, planning approval for Urbanest’s Vine Street development plans with King’s College will deliver 1,519 new beds. Planning applications for 2017 have been non-existent for Zone 1 with speculation that new development for the 2018 and 2019 will also be the same.

‘The (Brexit) referendum appeared to have little impact on the investment flow and the value of trade was in fact higher in the six months after the referendum than before, with £2.1bn flowing in during the second half of 2016, compared to £1.9bn before.’

Jacqui Daly, director of Savills’ investment research and strategy, told the Telegraph earlier this year in regards to Asian investors:

“Their continued investment in 2016 is a massive vote of confidence in the sector. Because of the yearly tenancies, it usually has strong rental growth year-on-year, and it is “countercyclical, making it a good hedge against other risks.”

JLL reports that foreign and UK investment into the London student accommodation market share since 2011 as:

‘UK operators remain the most dominant in the sector, accounting for 47% of all purchases since 2011. North America is the largest source of overseas capital, with more than £1.5 billion coming into the London student housing market from investors including PSP, CPPIB and Goldman Sachs.’


Student Rental Sector

The rental market for the future is expected to remain steady at 3% to 4% per year due to demands from international and postgraduate students. However, rents could be under pressure for increases as new bed developments are weak.

For the PBSA rental market, 2017 could be a record year for the investment student housing market:

‘With limited single asset investment opportunities available those that come forward will attract strong investor interest. There will be a continued focus on development opportunities but with increasing barriers to entry preventing any meaningful supply side growth.’

With development having declined by 41% over the past three years in Central London areas such as Zone 2 and beyond as a result of the decline of new student properties and costs.

Construction Issues

Inflation and a weak pound have resulted in costs increases for new construction with materials increasing by 5% or more in the Q2 in 2017.

Development costs were at approximately £60,000 to £70,000 per bed in 2014 and 2015 with the increase of 29% for 2017 has put new per bed development excluding land costs at £80,000 to £90,000.

JLL analysis shows the Community Infrastructure Levy (CIL), a fee on new development to fund local infrastructure in London, is at £202 per sq. m which exceeds the average of £96 per sq. m for university markets for the rest of the country. The school accommodation development is the second highest levy for CIL outpacing both the commercial and hotel sectors. It is reported that the London boroughs of Camden, Islington and Hackney are using this charge to control the student housing development market by increasing the rates. Outer London boroughs including Barnet, Brent and Croydon have also increased the CIL rate which is expected to add £7,000 per bed to development costs.

Additional construction for residential and commercial needs and Crossrail with the new Queen Elizabeth Line and the Bakerloo Station extension for Crossrail 2 have had an inflationary impact on land costs particularly for Battersea, Nine Elms, Elephant and Castle and Stratford have kept PBSA the sector from expanding.
Best investment locations for student accommodation?

According to their review Savill’s recommends: ‘Exeter, Guildford and Leeds as good areas to invest in, due to low levels of supply and the universities’ success in attracting new students. Liverpool slipped down in the rankings due to worries of oversupply.’

By Kevin Murphy: www.kevinmurphy.london

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