What are the Challenges for Student Housing Investment in the UK?

The investment opportunity in the UK student housing market has predicted to continue to dominate in 2019 as in the previous years. Let’s Bid Property team estimates that the value of the UK PBSA sector will hit £50bn by 2019. 

Today, the UK student property is regarded as one of the strongest investment platforms surpassing other traditional real estate markets. 

The UK universities continue to attract an increasing number of students from outside the UK, with the number of EU students growing by 63% and international students by 215% since 1999/00. There are now over 285,000 students from outside the UK, making up nearly one quarter (23%) of the student population.

Despite the opportunity that UK Student Property Market provides property investors in the UK, they're facing many challenges many challenges as well.

The Challenges in the UK PBSA Market

1. Brexit Uncertainty 

Brexit poses a huge uncertainty challenge for the property market as a whole in the UK. Despite of this uncertainty, the Student Housing Market is catching up in the UK. Global investors continue to acquire Purpose-built Student Accommodation (PBSA) assets in the UK. 

2. Undersupply of Student Housing

While, the UK is home to some of the best Universities in the world, there's an acute undersupply of student housing. 

Many Universities have almost 1/2 million under graduates and ¼ million post-graduate students enrolled each year. These Universities and cities are unable to meet the current demand for housing, which is why Purpose Built Student Accommodation has taken off so rapidly. 

In total in the UK there are over 2.3 million students, increasing on average by 2% per year, and currently the number of PBSA properties can only house around 20% of the student population, with the rest having to live in low quality, bad location properties.

3. Government Policy Restrictions

The restrictions in building permissions and the government’s support for housing development limits the existing residential housing stock that is available for students to rent. Markets where high competing land values and policy restrictions result in barriers to development. 

4. HMO Licencing Reform

The approach to HMO licensing of student accommodation properties varies greatly between different local authorities. Most recently, government has proposed to extend the scope of mandatory HMO licensing, without taking forward proposed licensing discounts for PBSA. 

The extension of mandatory licensing in the LHMO 2018 will mean that most HMOs that are occupied by five or more people who do not form a single household will require an HMO licence, regardless of the number of storeys. 

Mandatory licensing currently only applies to HMOs of three or more storeys. This change is expected to bring another 160,000 properties into the mandatory licensing regime, although most of these properties will not be PBSA schemes as purpose-built self-contained flats will be exempt.

5. Requirements of Draft Policy H17 

The draft new London Plan issued in December 2017 takes affordability requirements a step further. Draft Policy H17 requires that all PBSA “must either be operated directly by a higher education institution or the development must have an undertaking in place from initial occupation, to provide housing for students at one or more specified higher education institutions, for as long as the development is used for student accommodation”. 

If the PBSA is not secured for use by students and for occupation by one or more specified higher education institutions, it will not be considered PBSA. The draft Policy H17 requires 35% of student bedrooms in all new PBSA to be affordable. 

6. Rising Construction Cost

The costs of construction continued to rise with both material and labour costs on the increase. Such increases are forecast to continue into 2018 with increases in input costs offsetting any predicted deflationary effects. 

As a consequence, many developers, in both student accommodation and other sectors, are looking at ways to mitigate the effects of the current market and to protect margins, and one of the ways in which developers are seeking to do this is through the use of modular construction.

Conclusion

Notwithstanding these challenges, interest in the sector remains very strong, with a number of large portfolios due to come to the market in the next two quarters of 2019. It is therefore likely that Purpose-built Student Accommodation (PBSA) will continue to be a popular 'alternative' investment and will feature heavily in institutional investment portfolios.

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