PBSA continues to outperform other sectors
In 2023, the UK PBSA sector continued to show its attractiveness to investors globally with its inflation-hedging properties driven by strong rental growth, fuelled by an undersupply of high-quality operational accommodation, long-term strengthening demand and historically low levels of new supply. PBSA continues to outperform other sectors despite rising interest rates and high inflation, with unprecedented rental growth achieved for 2023/24 and strong prospects for 2024/25 forecasted. This rental growth has held capital values stable with best in class assets in prime locations increasing in value.
Investor demand remains strong for locationally driven best in class ‘clean and green’ properties with strong rental growth prospects. However, non-prime assets are seeing reduced demand from investors unless they offer value add opportunities that serve growing higher tariff universities. After a record setting year for transaction volumes in 2022 that involved large portfolio deals with £7.13bn of PBSA traded, increased uncertainty, greater operational scrutiny and ‘higher for longer’ interest rates stifled transaction volumes in 2023, resulting in £2.81bn of transactions completing .
The UK Higher Education sector as a whole remains strong with over 2.2 million full-time students, driven by recent increases in the proportion of undergraduate applicants accepted, the compelling international appeal of UK institutions and the growth of postgraduate study. Strong demand for university places continues to translate into an increased requirement for high-quality PBSA bedspaces at a level that the construction supply is unable to match. Significant rental pricing increases are expected for the academic year 2024/25, building on double-digit rental growth achieved in many locations for the academic year 2023/24. Emerging data indicates undergraduate student numbers are reducing to pre-COVID levels, but this is highly nuanced across the sector with continued polarization and growth of the higher tariff universities.
The latest UCAS Undergraduate 2023 admission data reports that a total of 752,025 students applied to UK higher education institutions in 2023, a slight fall of 1%, with acceptances also falling by 2%, reaching their lowest level since 2014. Undergraduate applications from UK domiciled students fell by 2%, with acceptances falling by 1% to 482,895. This can be attributed to a second consecutive annual decrease in the UK 18-year-old entry rate, which fell to 35.6% following a peak of 37.9% in 2021. However, current levels are still historically very high, as student participation returns to pre-COVID trends. Undergraduate applications from EU domiciled students fell by 4%, with acceptances falling by 7% to 10,570. Undergraduate applications from non-EU domiciled students continued sustained growth, rising by 2%, however, acceptances fell by 2%. The fall in acceptances can primarily be attributed to a 9% decrease in Chinese admissions compared to the 2022 peak. Despite this decline, China remains the dominant domicile of international students. In contrast, Indian acceptances have increased by 13%, indicating a shifting demographic in the international student make-up.
The flight to quality in the sector is more evident than ever, with higher tariff institutions experiencing a year-on-year increase in undergraduate acceptances, whilst medium and lower tariff institutions have seen fewer acceptances. Higher tariff acceptances make up 33% of total acceptances compared with 28% in 2014 and lower tariff institutions make up 34% in 2023 compared with 41% in 2014. The total number of undergraduates accepted to UK higher education institutions has increased from 512,370 in 2014 to 554,470 in 2023.
Aside from undergraduate admissions, the take up of postgraduate study continues to grow considerably. A transformation in postgraduate study - aided by the student loan system, visa changes, a desire for additional qualifications and universities looking to generate increased revenue means almost 538,375 students, representing over one quarter of students, now study at this level full-time. The latest dataset from HESA, for the 2021-22 academic year, reports that full-time postgraduate student numbers have grown over 54% since the 2017/18 academic year.