Real Estate Finance Insights

Real Estate Finance Insights

Students walking up the stairs

Your student days are meant to be the best days of your life, but I doubt the 2020/21 cohort would agree.

Restrictions placed on socialising and the reduction in face-to-face learning due to Covid-19 meant students had a very different university experience.

From Secure Trust Bank Real Estate Finance's perspective, we saw our borrowers as owners and operators of purpose-built student accommodation (PBSA) feeling the brunt of this, with occupancy rates and rent collections temporarily falling.

Recent research by Savills (1), however, supports our experience that a bounce-back is already underway. According to the property consultancy's latest PBSA report, Unite - the UK's largest PBSA operator - reported 94% occupancy in 2021-22, up from 88% in 2020-21, whilst their rents have grown by 2.3%. We are seeing similar occupancy figures and rental growth in schemes we currently fund.

Both domestic and overseas students have returned to campus and applications are rising. According to the Higher Education Statistics Agency (HESA) data, in 2020-21 the total number of HE students stood at 2,751,865, an increase of 9% on the previous year [2]. Growth was driven primarily by UK domiciled students, with an additional 104k joining the student ranks and offsetting the decline in non-EU students, which fell to 9.9% (2019: 16.1%).

What's more, according to Savills, the number of 18-year-olds in the UK is projected to grow by more than 160,00 over the next decade. This boost to the domestic demographic is good news for the PBSA sector's outlook.

Although many students reside in HMOs, PBSA remains their preferred type of accommodation. A Knight Frank/UCAS survey of 70,000 students revealed that 70% of first year students wished to remain in PBSA the following year, with 73% of second years agreeing [3].

PSBA is an increasingly popular alternative residential asset class for investors, preferred to traditional assets due to strong sector fundamentals, the growing student population and the higher returns available.

According to CBRE, the sector produced returns of 7.7 per cent from September 2020 - 2021, outperforming the all-property average, and supply is failing to keep up with demand [4].

That's not to say the sector is without challenges. Land costs are increasing across the UK, planning authorities are becoming increasingly restrictive on the location, size and quality of proposed schemes, and the challenge around build costs are now well-documented. The Greater London Authority is particularly restrictive regarding planning, with proposed schemes needing to be supported by a nomination agreement with a learning institution. Compounding this, I am finding there is a weight of capital chasing opportunities, meaning investors are taking on schemes with lower IRR with an element of 'hope value'. My view is many schemes simply aren't viable currently.

At Secure Trust Bank Real Estate Finance we remain confident in the sector's long term growth prospects, and we continue to support experienced investors in the sector who aim to provide quality accommodation to top-50 university locations. We also look at the micro location dynamics, considering any risk of excess supply and projected demand growth and work closely with our valuation partners, the borrower, and their managing agents to build a full picture of a location's long-term outlook.

We currently support 29 schemes with more than £149million of lending and we have a long track record of supporting the sector from its nascent beginnings. It is a sector we are continuing to back.

References:

[1]   Savills

[2]   HESA

[3]   Knight Frank

[4]   CBRE

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