The Growth of Private Purpose-Built Student Accommodation (PBSA) in the UK
25/01/2018

We are lucky in the UK to have some of the finest universities in the world. We continue to attract students from all corners of the globe, and with a record number now choosing to study at a UK university, the higher education sector is contributing some £40 billion to our economy.

There is little doubt that the growth of private purpose-built student accommodation (PBSA) has been a game-changer for UK Higher Education. Despite universities having grown rapidly – with around 30% more people studying in the UK in the last ten years – many institutions have been constrained in the amount of capital they can invest in student accommodation, and have partnered instead with private providers to deliver high-quality homes for their students.

The number of private PBSA beds now out-numbers university beds for the first time according to most analysis, including research undertaken by ANUK. This trend is set to stay as demand is expected to continue to outstrip supply in many, though not all, towns and cities. From 2014-16 the number of students choosing private PBSA increased by 12% to 132,720. Whilst there is ongoing development and a significant pipeline in many regions, the market continues to suffer from structural levels of undersupply, particularly in London with the proposed London Plan suggesting a need for between 20,000 and 31,000 additional bed spaces in the capital by 2025.

As the number of beds has increased, so too has Investor interest. The sector has seen considerable trading activity in the last few years and now comprises main market and AIM listed companies such as Unite plc, Scape (Gravis Capital Partners) and Hello Student (Empiric), as well as privately owned businesses like iQ, and pension fund owned like UPP and Liberty Living. Over £5 billion was traded in 2017, with iQ acquiring Pure for £869m in December 2017, and other large deals including Tristan Capital Partners’ £439m acquisition of the Downing Portfolio and Liberty Living’s £410m acquisition of the Union State (Victoria Hall) Portfolio. 2018 looks set to start with a bang with Student Roost (Brookfield) widely rumoured to be on the verge of acquiring the CBRE Global Investors’ Curlew portfolio, currently managed by Fresh Student Living, in a £520 million deal.

As we are seeing through the growth of iQ, many students are attracted by the quality of private PBSA which in numerous cases has the simple advantage of being much newer than university accommodation, which is also rightly often reserved for first year undergraduates. In most instances private PBSA has taken market share from HMO’s, geared to returning undergraduates and postgraduates, rather than universities with an attendant quality rise in ‘off street’ properties in many cities – a win win for the student customer. There is also substantial evidence of innovation in the private sector, as the market matures and competition for students increases. Opal wowed everyone in early 2000’s with swimming pools in their halls but, if they are so minded, today’s students can choose options with gyms, private dining, cinema rooms, music rehearsal space, dance studios and a whole plethora of study and relaxation spaces. Universities have rightly woken up to these design improvements and those fortunate enough to be in a position to develop on balance sheet are also beginning to innovate.

The relationship between the university and private PBSA provider is key to many of the aforementioned companies. Around 40% of iQ’s beds are leased directly to universities with Unite and Liberty both around the 60% mark.  Businesses of scale recognise the benefit of de-risking some of their portfolio by giving up higher gross revenues in exchange for income stream certainty and an element of yield compression that comes with a university covenant. The university in return enjoys less strain on its balance sheet and some of the more imaginative structures allow rooms to be flexed up and down reducing risk in the post numbers cap world.

So why did iQ acquire the Pure Student Living portfolio in an £869m deal in December? Quite simply, we and our shareholders have a huge belief in UK higher education and the fundamentals of PBSA as an asset class. Through the acquisition, we are addressing the rising demand for quality accommodation in London, Edinburgh, Bath, Brighton and York. The efficiencies of scale we can drive through the business will ultimately benefit our university and student customers in places like London where iQ now operates close to 7,000 beds. The deal has resulted in iQ being the second largest provider of purpose-built student accommodation in the UK with a portfolio value of £3.2 billion and the market leader in London and Manchester.

There seems little doubt there will be further M&A activity in the coming years which reflects the health of UK higher education even in the face of Brexit and ongoing debate about the inclusion of international students in the migration count. The aggregation of smaller providers and operators will drive professionalism in the sector and should ultimately drive up standards. It is nevertheless important to get to know the providers in your town and who owns them so that you understand their culture and values and they understand yours – the more so if you plan to work with them or refer students to them. Consider change of control provisions in agreements but above all work collaboratively with these providers to ensure that students have the very best experience in their living environment as well as their learning environment. In this small way we will all contribute to the UK attracting the best students from all corners of the world, and continue to be a world leader in higher education.

David Tymms is Commercial Director of iQ Student Accommodation and Chairman of the British Property Federation’s Student Accommodation Committee.

David was a CUBO member from 2000 – 2008 whilst Director of Residences and Catering at LSE