Got a (student) room for rent?

The pandemic surge in university entrants reversed the trend of easing supply/demand pressures in student accommodation, fuelling rental growth in 2022. Rents in the purpose-built student accommodation (PBSA) sector grew an estimated 3.1% on average in 2022¹, with some cities seeing double-digit growth. Rents in the house in multiple occupancy (HMO) subsector have also grown strongly, at 5.2% year-on-year on average.²

Higher interest rates, increased legislations for residential landlords and stronger energy efficiency requirements suggest this supply/demand imbalance is unlikely to ease anytime soon.

Student demand for housing – ever growing

We believe these dynamics will have implications for both the student accommodation sector’s investment performance and potentially student intake.

In recent years, provision for student accommodation has been stretched but manageable, with the student-to-bed ratio³ declining. But the situation changed following the large student intake during the pandemic.

We estimate there are 30,000 more students at university than indicated by the pre-pandemic trend – with the excess being predominantly UK students. This follows the use of teacher-assessed grades, rather than examinations, during the pandemic.

The number of 18-year-olds in the UK is also expected to rise over the rest of the decade, which will naturally boost student numbers. Demographic change, without any increases in participation rates, would mean domestic student numbers increase by 2.4% per annum over the next five years, well above the 0.7% growth recorded in the five years before the pandemic.⁴  

Additionally, recessionary environments have typically resulted in higher student numbers, as many choose to upskill rather than enter a difficult labour market.

Housing supply – struggling to make the grade

But supply is unlikely to meet this increased demand. In recent years, PBSA developers have faced higher local planning hurdles including increased affordable housing requirements, nomination agreement requirements⁵ and general unease among local residents about students as neighbours.

Together with rising construction costs, higher financing costs, softer yields and an expected UK economic downturn, this suggests growing the stock of PBSA in the medium term is likely to be more difficult.

Individual landlords: under pressure

The outlook for new HMO supply from the small individual landlords that dominate the subsector also looks limited. Higher financing costs will likely disincentivise new investment in our view, as will increased legislation around mandatory landlord licensing, energy efficiency improvements, gas and fire safety standards, and additional local planning requirements for new HMO conversions.

We believe these trends mean rental growth in the student accommodation sector is likely to remain strong in the medium term, although the magnitude of that rental growth is uncertain.

Affordability will be key

Affordability concerns are likely to remain a key issue. PBSA has typically been the domain of international students but it’s likely that domestic students may make up a bigger proportion going forward. Average PBSA rents outside London already take up most of a typical student maintenance loan – and in larger cities surpass them. With maintenance loans falling in real terms the likelihood is that those pressures will increase.

In summary, we believe the student accommodation sector is structurally undersupplied and resolving this issue will take some time. In our view, this will likely result in asset owners in the sector witnessing strong rental growth and potentially superior investment performance relative to the more traditional real estate sectors over both the short and medium term.

The potential for rental growth is caveated by affordability concerns given the likelihood of UK nationals becoming an even greater proportion of the student mix, the decline in real terms of maintenance loans, and the UK’s cost of living crisis.

Nonetheless, we believe the structural issues around student accommodation and the countercyclicality of student demand can provide the pricing power needed to drive real estate performance.

1. StuRents Annual Report 2022

2. ibid.

3. Calculated as the total number of PBSA beds + HMOs as a proportion of estimated students that rent privately

4. UCAS – End of Cycle Report 2022

5. A nomination agreement requirement is a contract between a PBSA owner and a university whereby the university agrees to directly provide a percentage of students to fill up the block each year.