Student Property Market Recovery
Is the student property market on the road to recovery?
2020 was a challenging year for the student property market and for universities. The start of 2020 marked Britain’s official withdrawal from the European Union. A lack of formal agreement meant there was uncertainty regarding the status of prospective EU students studying in the UK, including fees they would have to pay and what visas they would need afterwards to remain in the UK.
In March 2020, the UK government enforced a national lockdown to curb the spread of the Coronavirus pandemic. This meant universities either had to suspend lectures and seminars or move to online learning and lectures broadcast through video communications. Due to a lack of in-person learning and uncertainty surrounding when a normal routine will be resumed, many students either deferred their application or if they were currently studying, chose to stay at home rather than rent student accommodation.
Increase in overall applications to UK universities
The 2020/21 year saw a marked 13.5% drop in EU student applications, which was somewhat surprising as it was the last year that students from the European Union would be eligible for home fee status, where they would pay lower fees. The 2021/22 intake from the EU will be subject to international student fees which can sometimes be more than £30,000 per annum depending on university and course. This has proved to be a major factor in the decline of EU applications.
According to UCAS, by the January 2021 deadline for applications, the number of EU applicants stood at 26,010 which is down from 43,030 the previous year. That represents a drop of 40%, with the largest percentage falls in South-eastern and Eastern Europe. A survey of 2,500 EU students suggests that up to 84% of them were put off studying in the UK due to the status change.
Despite the drop in EU applications, international applications from non-EU countries remains strong. There was a 17.1% increase in international applications from non-EU countries for 2021/22. There were 130,000 university applications from Chinese students, who are over 2.2 times more likely to live in purpose-built student accommodation than domestic students. There was also a 60.7% year-on-year rise in applications from USA students, who are 1.9 times more likely to live in purpose-built student accommodation.
Student accommodation occupation
Occupation dipped slightly in the 2020/21 year due to lockdown restrictions and people either forced to move out of their accommodation or postponing their studies. Unite, the largest PBSA operator in the UK, reported a fall in occupancy from 98% in 2019/20 to 88% in 2020/21. GCP REIT reported that it had let 69% of its rooms in June 2020/21, down from an average of 94% over the previous five years. This affected the rent that was collected in that period, with GCP reporting that it expects to collect 55%-60% of budgeted income in 2020/21.
Although occupancy and rental yields through purpose-built student accommodation fell in 2020/21, the sector was far less affected by the pandemic than other property sectors and stabilised at the beginning of 2021. When shops closed during lockdowns in March 2020, the government issued a moratorium on evictions. This has meant that rental debt on Britain’s high street has spiralled and shows no sign of abating.
Commercial property owners collected less than a fifth of what they were due earlier in June 2021, to cover the three months until September 2021, according to commercial property management tool Re-Leased. Over the last fifteen months, rent debt has built up as restaurants, shops and bars were forced to close. It is estimated that rental arrears for this commercial property sector total around £6bn.
Record amount of investment in purpose-built student accommodation
Investment funds are recognising the stability and sustained potential of the student property market, especially compared with other commercial assets that have been more affected by the pandemic. Yields in the student property sector have largely remained stable despite a pandemic, suggesting that any dip in performance of the asset is temporary due to external factors rather than due to any structural weakness.
In fact, 2020 was a record-breaking year for investment in the purpose-built student accommodation sector. Investors poured £5.77bn into the sector, which was a 5.7% increase on 2019 figures and a 0.8% increase on the previous record in 2015. One deal accounted for most of the activity within the market, with Blackstone acquiring iQ Student Accommodation from Goldman Sachs for £4.66 billion. Along with seasoned investors in the market, there has been a high number of newcomers to the sector.
For individuals looking to invest in student property, we have two completed developments that are already operational. The Mill is in Lancaster and is the closest PBSA development to Lancaster University campus. The lack of rival developments maximises the occupancy potential and a 7% net yield is contracted for five years. Prices start from £91,950 and the development also boasts an onsite café, cinema, gym, and games room.
An alternative option is based in Stoke-on-Trent in the West Midlands. Similar to The Mill, Poulson House is the only University approved PBSA. Poulson House is a completed development and has been operational for three years. A 7% net return is contracted, backed by income and financials. Studios in Poulson House start from £59,950.
Successful vaccine rollout means study will return to near-normal
First vaccines are now available to those over 18 in England, Northern Ireland, and Wales, and over-30s in Scotland. The UK has hit its target in terms of vaccine rollout and ensuring that the population is fully vaccinated is considered the main route out of lockdown.
Universities are already making the effort to ensure that in-person teaching is available where possible and have introduced certain measures against COVID-19 including offering free weekly testing for students, installing Perspex screens, adding signage and markings to buildings to ensure social distancing, and enhancing cleaning regimes.
As the government has committed to the removal of all lockdown restrictions from the 19th July, most universities are confirming that their campuses will be open for students and there will be a mix of online and in-person learning from the 2021/22 academic year.
Student property in the UK continues to be attractive to investment funds and individuals. In the 2022 edition of the QS World University Rankings, 18 of the top 100 universities are in the UK and the quality of its institutions continues to attract considerable numbers of students from across the globe. According to Statista, the UK has the second highest number of international students in the world, just behind the US. International students are more likely to live in purpose-built student accommodation, and this statistic combined with a lack of appropriate accommodation in many of the UK’s university towns and cities, creates and ideal environment for investors looking to achieve good rental yields.
Interest payments on bank savings are dependent on several factors and one factor is the Bank of England base rate, which has stayed at 0.1% since March 2020. Payments will go up when the base rate goes up, but as the base rate has stayed the same for so long, any dramatic change to earnings seems unlikely. For those looking to achieve higher returns on their savings, student property could be a viable alternative. A successful investment would be dependent on a few factors, including the type of development and its location. Read our insight to learn more about the student property market fundamentals, including the top ranked places for student accommodation the demographics that influence those rankings.
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