Out-Law / Your Daily Need-To-Know

Real estate investors should look at student accommodation amidst economic headwinds

Out-Law Analysis | 09 Jan 2023 | 9:53 am | 3 min. read

The prospect of prolonged economic uncertainty threatens the returns and yield investors can expect to achieve in core commercial real estate markets.

In the retail sector, the increasing cost of living is limiting consumer spending power which will further increase the pressure on retailers that are only just emerging from the challenges brought by Covid-19. This is only likely to accelerate the existing trend towards the repurposing of retail assets as demand for retail units falls.

The office market is also under pressure in many parts of the UK. The pandemic forced a shift to remote working – a change that many workers have considered beneficial to their work-life balance. While the position varies across cities and from company-to-company, as many employers encourage a return to office working, the increased living costs make the prospect of long and expensive commutes into city centre offices an unattractive prospect for many workers. Many businesses are evaluating their long-term floorplate requirements and considering downsizing when their existing lease expires. However, prime located stock will always be sough after, as other occupiers decant from further afield to fill any resulting vacancies.

Whilst the industrial sector roared throughout the pandemic, more recently the market was starting to reach saturation point even before Amazon announced in the summer last year that it was halting the acquisition of new sites. As with physical retail, a squeeze on consumer spending is also likely to have a dampening effect on online sales, resulting in weaker demand for storage and logistics space.

In this economic environment, it has been unsurprising to see real estate investors consider putting their money into alternative real estate assets – student accommodation presents a compelling proposition.

The student accommodation sector is experiencing a surge in demand. The demographics are such that the number of young adults of university age will continue to increase steeply until 2030. This is coupled with an increasingly diverse pool of international students, with a strong number of students continuing to come from China now sitting alongside particular growth in the number of students from India and Nigeria.

Much of the focus up until now of investors in the student accommodation market has been on building new high-end properties geared towards international students, fitted with all mod cons and even luxury facilities such as swimming pools and cinema rooms. However, the anticipated growth in the number of domestic students and international students from countries with a less beneficial currency position means that there will be growing demand for more basic, affordable accommodation in the years to come.

High building costs mean that developing accommodation from scratch to let at a more affordable price point is unlikely to be viable. Instead, there are opportunities for returns for investors willing to engage in turnaround projects involving refurbishing and repositioning ‘first generation’ student accommodation assets.

There has also been a noticeable change of sentiment in relation to traditional student digs – houses of multiple occupation, or HMOs. Previously, these were seen largely as something that purpose-built student accommodation (PBSA) needed to replace and eradicate. Now, professionalised and aggregated by an institutional investors, HMOs are becoming seen as a complementary offering that targets a different customer base. The continued persecution of the private investor through adverse tax changes and increased regulation coupled with appreciably higher borrowing costs on often relatively highly geared assets, all mean that now is a good time for institutional investors to assemble a portfolio of HMOs, provided they have the patience and experience to deal with the granular nature of the opportunities.

The student accommodation sector is ripe for growth in Europe too, where there is a much greater shortage of supply currently. Some investors have already explored projects in countries such as Spain and Portugal. High building costs and rising cost of debt in the UK is only likely to prompt others to go harder and deeper into Europe.

Provided that you have the right product in the right location, student accommodation offers investors stable cashflows with the ability to rebase rents on an annual basis to achieve the desired returns. Whilst inflation in operating expenses, including, in particular, energy costs, has been problematic in the short-term, most investors have now sought to mitigate their position so far as they can and/or to pass on such costs through annual rental increases.

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