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Why student accommodation is a good investment — and the university cities with a shortage

The Meadows Student Accomodation, University of Essex, Colchester, United Kingdom. Photo by: Hufton+Crow/View Pictures/UIG via Getty Images

As student numbers grew over the past few years, so did demand for accommodations. But student housing supply has not kept up in many university towns and cities, creating opportunities for investors. The wider housing crisis is also making matters worse.

With universities no longer able to provide enough housing — as they face their own financial difficulties amid government cutbacks — the private sector stepped in to offer Purpose Built Student Accommodation (PBSA) where there is strong demand.

The total value of PBSA will reach £53 billion in 2019 with annual rental growth clocking in at 2.26%, according to estate agent Knight Frank.

“Despite Brexit, global investors continue to acquire PBSA assets in the UK, fundamentally underpinned by the UK’s world renowned higher education system,” wrote James Pullan, global head of student property at Knight Frank, in Property Week at the start of this year.

“The asset class offers a stable income stream, with strong year-on-year rental growth prospects. When compared to more mature asset classes, such as the offices sector, PBSA is standing out and that looks set to continue into the new year.”

A report in 2018 by Cushman & Wakeman noted that there are more students in higher education than ever before, with 1.8 million people studying full-time at university, a 3.3% rise over the year.

The same report said 31,348 new beds were delivered during the year, taking the total for PBSA to 627,115. But much of this new development is concentrated in a handful of cities.

“Student number growth, site availability, and local policy has concentrated development in particular locations, with just four markets accounting for 25% of all new beds in the last five years,” the report said.

“Ten markets now have over 20,000 purpose-built bed spaces available to students, compared with just three in 2014.”

Cushman & Wakeman also said students are willing to pay higher rents for ensuite rooms close to campus with plenty of amenity spaces for socialising.

For example, excluding London, student rents in accommodations just five minutes from campus rose by 3% last year, compared to zero growth in those 20 minutes from campus.

“There are signs that the quality of amenity spaces is now feeding through to the success of schemes, with those offering high quality amenity spaces increasing rents by 3.0%, with those with poorer quality spaces only managing to increase rents by 2.5%. In our view, these spaces are now crucial to scheme success,” the Cushman & Wakeman report said.

The estate agent Savills compiles an annual league table of the best prospects for PBSA investments, taking into account a number of important factors.

It weighs the ratio of student housing to full-time student numbers, the PBSA development pipeline, affordability, rental growth prospects, local planning policy, and demand for competing land uses.

Savills released its latest league table in October 2018. The university cities coming out on top as most attractive for PBSA investors were Bath, Birmingham, Brighton, Bristol, Edinburgh, Guildford, London, Manchester, Nottingham, Oxford, and Reading.

Slightly less attractive, but still worth considering, are Exeter, Glasgow, Leeds, Leicester, Northampton, Norwich, St. Andrews, Stirling, and Winchester.

But Savills warns that its rankings are only a general indicator and “the suitability of specific schemes within each city will vary.”

So if you invest, choose carefully and weigh the crucial factors such as student demand, the university’s future prospects for attracting students, proximity of the development to campus, likelihood of planning consent, and both internal amenities and those nearby.