Attractive, stable and compelling

Growing Maturity

Despite being considered an alternative investment, PBSA is cementing itself as a mature real estate asset class, with the potential to generate significant income and be resilient even in periods of economic downturn. As reported by CBRE's 2020 Student Accommodation Index, PBSA was the best performing asset class in the year to September 2020. Looking forward, Savills's five-year forecast released in January 2021 had PBSA as the third best performing sector.

These strong returns are also associated with lower volatility, meaning the sector has produced risk-adjusted returns roughly three times as high as the mainstream market. Like all sectors, PBSA has been affected by the COVID -19 pandemic with capital values falling 0.4% in the year to September 2020, its only fall in the past decade. However, PBSA saw one of the smallest decline in capital values when compared with other sectors and still saw rental growth of 1.6% in the year to September 2020, the fifth consecutive year of outperformance against the mainstream market. Only Industrial saw higher rental growth in 2020 (at 2.0%) while both Office and Retail saw rental values fall (2.2% and 8.1% respectively).

CBRE's 2020 Index also highlighted an increasingly clear polarisation in the PBSA market with London and Super Prime Regional assets outperforming Prime Regional and Secondary assets. In the year to September 2020, assets in London and Super Prime Regional locations experienced positive capital growth, while assets in Secondary markets saw capital values fall 9.9%. This is also mirrored with rental growth where in the same period, Super Prime markets saw a 2.8% rise in net rental growth and Prime Regional saw a 1.7% rental growth, whereas Secondary markets saw net rents fall 2.3%. The Empiric portfolio is well aligned to the high-growth locations with 86% by value classified as either London, Super Prime Regional or Prime Regional.

Positive Student Demographics

In UCAS's End of Cycle Report 2020, positive demand statistics for the 2020 admissions cycle were reported. The data indicates that 728,780 students applied to higher education ("HE") providers in the UK in 2020, up by 22,345 students (+3.2%) on 2019. Applications from non-EU domiciled students rose 12.2% to 98,660, significantly offsetting the small fall in applications from EU domiciled students.

Overall student acceptances reflected stronger growth with 29,235 extra students (+5.4%) which included EU students increasing by 1.7% and non-EU domiciled students by 7,615 (+16.9%), highlighting the continued appeal of HE providers in the UK for overseas students, despite short-term restrictions on international mobility. Notably, UCAS report 24% and 35% year on year increases in applicants from China and India respectively with also significant demand from the USA.

The UK's International Education Strategy continues to secure the country's position in the global HE sector and support graduates with a generous post-study work visa system.

Student Demographics

Alongside positive international demand, domestic demand for HE continues to grow. In the coming decade, growth in the full time (FT) student population is forecast to be driven by a higher participation rate and the absolute growth of the 18-year- old cohort in the UK which has been in decline over the past 5 years. UCAS reports that the proportion of UK domiciled 18-year-olds accepted by UK providers increased from 34.1% in 2019 to 37% in 2020. The research also projects that the population of 18 -year-olds will rise from around 710,000 in 2020 to 850,000 in 2026.

In 2020, demand was also boosted by centre assessed grades, which resulted in a greater number of school leavers with the required grades needed for acceptance into higher ranked universities. Higher ranked universities have benefited the most, with applications rising 31% since the cap on student numbers was lifted in 2012. Conversely, applications to medium ranked providers only rose by 4% and lower ranked universities fell by 15% in an ongoing trend. In HESA's latest data release, 384,030 people were reported to have enrolled on a postgraduate course in AY 2019/20, up 10% on the previous year. This rise in postgraduate student numbers is expected to continue, repeating previous counter-cyclical behaviour in periods of economic downturn. Following the global financial crisis, full time postgraduates grew from 161,015 in 2007 to 207,595 in 2010.

Constrained Supply

The long-term fundamentals of PBSA including the demand supply imbalance remain compelling particularly when focusing on high-quality assets in desirable locations. According to research combining HESA 2018/19 data and PBSA supply for 2020/21, only 57% of demand for PBSA is currently being met, 65% including consented pipeline. In 2019, JLL reported that the pipeline had declined by 25% in the three previous years, a trend which appears to have been exacerbated by COVID-19 restrictions, which paused construction on many sites leading to delayed completions for the year to September 2020. StuRents report that in Q3 2020, developers applied for consents for fewer than 3,000 beds, with 3,395 being approved, showing falls of 73% and 44% respectively on Q3 2019. Comparatively, in 2016 planning applications peaked at 50,000 beds. This decline has been in part due to the rise of alternative living sectors such as PRS refocusing developer attention, the growing difficulty in gaining suitable PBSA consents in increasing restrictive planning environments, along with several Secondary markets becoming oversupplied.

The Flight to Quality

Whilst some property sectors experienced a virtual shutdown in transactions in 2020, largely due to the impacts of COVID-19 and Brexit-related uncertainty, PBSA remained comparatively resilient. The global investment appetite for UK PBSA was very strong at the start of 2020 with portfolio and M&A activity continuing to be a key feature of the market, following significant portfolio acquisitions in 2019. In Q1, the sector's attention focused on Blackstone's purchase of the iQ student portfolio for £4.66 billion, the largest ever private real estate transaction in the UK. With several well-funded prospective buyers willing to pay premium pricing for the 32,000-bed portfolio, this transaction affirmed that PBSA was more attractive than ever for investors in Q1 2020. Following a reduced level of activity during the first lockdown, the market has been gathering pace with a further £1 billion traded since March 2020. With the iQ transaction and the recovering activity in H2 2020, the year saw the highest transaction volume ever for UK PBSA at £6 billion.

To reflect the short-term income uncertainty caused by the pandemic and the long-term strength of the sector, rental guarantees from vendors for the 2020/21 academic year have been widely used to support transactions. These have facilitated the market by protecting the purchasers' short term income position. The flight to quality continued in 2020, with investors focusing on high-quality assets in markets with strong universities and compelling supply and demand characteristics, reflected by transactions in Super Prime and Prime Regional locations. Despite COVID-19, July 2020 saw KWAP acquire 700 operational beds in Leeds and Sheffield for £89 million. This purchase of Symons House (351 beds) and Crown House (335 beds) reflected £127,000 per bed and a yield of 5.50%. In August 2020, GSA & Harrison Street added further stock to a growing portfolio with the acquisition of Print Hall (267 beds) and Unity Street (217 beds) in Bristol, for £58.2 million, reflecting £120,247 per bed and yield of 4.90%.

The ever maturing and polarising nature of the PBSA market has been reflected in yield compression in the best -quality segments. CBRE report that between Q4 2019 and Q4 2020, best-in-class direct let Super Prime Regional and Central London yields compressed by 25 basis points and 10 basis points respectively, while Prime Regional yields stabilised and further softening in Secondary Regional locations was experienced.

In the post-COVID-19 landscape, investors are expected to be drawn to sectors such as PBSA, which exhibit stable income returns and counter-cyclical behaviour. Unlike other sectors facing structural challenges, the long-term demand for HE and the undersupply of high-quality PBSA beds will underpin investment demand in the coming years.

Increase in higher ranked university applications in 2020

+31%

Market Yields - Best in Class, Direct Let