Purpose-built student lets dangerously reliant on overseas students

Research by UK’s largest student accommodation search platform, StuRents, has revealed that while the UK Purpose-Built Student Accommodation sector (PBSA) has seen sluggish growth in the midst of a challenging year with 23,000 beds added in 2021, it could face further obstacles if the pace of growth in foreign students, especially from China, drops – the single most-important demographic for the PBSA sector equating to 29.2% of non-EU acceptances in 2020.

The PBSA sector has swelled largely thanks to the influx of foreign students. The latest statistics from UCAS show that there was an additional 5% uptick in placed Chinese students compared to the equivalent period last year (2020: 8.8%). Albeit acceptances from those based in the EU collapsed by over half (56.4%), representing 16,710 fewer students – offsetting increases in acceptances from domestic and international students.

However, data shows that the number of visas issued to Chinese nationals had dropped by 58.7% in the 12-month period up to September 2020, creating significant challenges for PBSA providers as they scrambled to fill as many beds as possible. While the most recent numbers for 2020-21 show a partial recovery with those issued to Chinese students increasing by 177.5% for the nine-month period ending June 2021, they are still down by 2.7% compared to the equivalent period in 2018-19.

Importantly the impact has varied per location and regionally, cities such as Bristol and Nottingham have been buoyant this year due to particularly strong demand growth, while there have been challenges in cities such as Coventry and London due to their particularly high exposure to international students.

What COVID has shown, through a reduction in demand, is the reliance that PBSA places on international students to maintain healthy occupancy levels. With the cost of PBSA significantly more than the average maintenance loan provided to students in England, in a large percentage of cases PBSA rents must be slashed to make it a financially viable alternative to HMOs.

With a declining Chinese youth population and the rising quality and quantity of good quality Chinese institutions, if and when growth stagnates, competition between the major English speaking study destinations and operators of PBSA is likely to intensify.

UK HMO market remains bullish

Whilst year-on-year growth in enquiries for Houses in Multiple Occupation (HMO) accommodation was less impressive than for PBSA, at 10.4% (PBSA:150.0%), the sector was not as severely impacted as it was for PBSA, with demand for HMOs remaining strong throughout the pandemic.

The desire from domestic students to live away from the parental home remains strong, with the majority of house-hunting activity occurring between October and January, as normal.This demand growth has been strongest at Russell Group universities and those institutions deemed to be prestigious with 35.0% more yearly acceptances at higher tariff providers in 2021 compared to 2013. In comparison, medium tariff providers reported growth of 9.8%, whilst lower tariff providers saw a reduction of 12.6% over the same period.

Richard Ward, Head of Research at StuRents, commented: “Overall, both the PBSA and HMO sectors have weathered the storm of the past 18 months with the sector outperforming other asset classes such as retail.

“However, while the HMO market has been largely insulated from the pandemic due to its early lettings cycle and strong domestic demand, UK PBSA has faced a number of hurdles due to travel restrictions and the uncertain conditions facing students due to COVID-19. More importantly, the pandemic has exposed the PBSA sector’s reliance on international students, which was felt acutely at the peak of the outbreak. While the appetite for higher tariff institutions remains for now, competition is becoming fiercer, and investors will need to be aware that only the very best locations containing renowned institutions are likely to outperform.

“Crucially, the suitability of an investment should not be based on broad market analysis or institutional reputation alone. The most discerning investors are realising the importance of evaluating the granular, local conditions to ensure an appropriate product fit, rather than relying on national trends.”