Investing In The U.K. Student Housing Sector (PBSH)

Invest In The Future By Investing In Student Housing

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Student housing is gigantic, global, and growing. Savills states that 2016 saw US$16.4 billion invested into global student housing. The United Kingdom and the United States traditionally lead the Purpose-Built Student Housing (PBSH) sector. In Europe, 80% of PBSH is focused in the U.K.

And, although I predict the U.K. and the States will continue to reign for some time to come, other European countries are starting to sniff around their thrones.

The U.K.’s Property And University Markets

I’ll be focusing on the U.K. Full disclosure: I am a tea-gulping Brit—but that’s not why I’m bullish about this market. The numbers go beyond patriotism.

London typically sees a 3.75% net yield on PBSH, and other parts of the country hit about 4.5%. To put those percentages into perspective, in London 3.75% is only 0.25% less than grade-A commercial office returns.

Why Compare Student Housing To Commercial Property, As Opposed To Other Residential Property?

Offices are feeling Brexit and, although universities were anticipated to react poorly to Britain’s decision to leave the European Union, they have not. A leading real estate agent stated “Uncertainty around Brexit and Trump has done little to alter the [PBSH] sector’s appeal in the U.K. and U.S.”

A study carried out by London Economics shows that each non-EU student in the U.K. brings in 102,000 pounds (US$141,300) per year and that London’s economy gains 4.6 billion pounds (US$6.37 billion) a year from international students.

British universities were forced to make major changes to their fees a few years ago. The average tuition cost per year is now 10,000 pounds (US$13,850) for British and EU undergraduates. The average tuition fee per year for non-EU students is anything between 10,000 pounds and 35,000 pounds (US$13,850 to US$48,460). The rise in fees is largely due to a lack of state funding. However, these increased fees do not apply to student accommodations. Consequently, private companies are taking up the reins.

Until Brexit is fully negotiated, we don’t know if the government will place restrictions on EU students studying in British higher education. Will they be considered non-EU and thus pay higher fees? If so, will they shy away?

Regardless, there are three things that history has confirmed:

  1. Recessions tend to boost education as people need to up their skills to find work. Brexit may or may not result in a recession.
  2. British universities are held in such high esteem that many international students attend despite high tuition costs. 20% of undergraduate students are not British; at postgraduate level 54% are not British. China accounts for the most non-EU postgraduates.
  3. Foreign students do not have families close by, thus they are forced to rent accommodations.

When you start talking about 10,000 to 35,000 pounds per year for an undergraduate three-year course—and then probably another two years for a postgraduate course—you realize that these international students come from wealthy families that don’t worry where their next meal will come from.

Nor are they pinching pennies with their darling offspring’s accommodations. A debate between a 125-pound- or 450-pound-per-week flat (US$173 or US$623) just isn’t something they’re entertaining.

British PBSH—The Big Players

The most active global investors are wealth and pension funds, all looking to widen their portfolios and unable to resist the obvious returns. In 2017, the largest single investor was GIC, a sovereign wealth fund company from Singapore. Like other investors, GIC is spreading their investments and diversifying their portfolio by participating in U.S., U.K., German, and Australian PBSH markets.

Why Is PBSH Overtaking Traditional Student Digs In The U.K.?

In the past, students shared a flat near their university or used residence halls and shared dormitories on the university campus, provided by the university. However, studies by Student.com, Savills, and other leading agents have concluded that students nowadays prefer private rooms or studio apartments in buildings with social spaces, cinemas, gyms, study areas, and game lounges.

Today’s students are demanding customers, prepared to pay for amenities and services. What may be considered luxuries for some are considered essentials for Generation Z, born between the mid-1990s and mid-2000s. Generation Z is bold and, knowing that the provider is a private company rather than part of the education institution, “the customer’s always right attitude” comes into play.

A U.S. Investor Can Reap Rewards In The U.K. In Three Ways

First, although North Americans may shy away from investing in pounds because the pound is stronger than the dollar even when it is weak, the investment would yield a return in pounds. This makes the investment more than worthwhile. Furthermore, investing in student accommodation is cheaper than regular residential property (less layout), so these properties are more attainable than standard housing.

Second, diversifying your portfolio to include a variety of markets and currencies makes for a safer portfolio. Although the pound is creeping up since its awful crash after Brexit, it is still not as high as it has been previously. Consequently, now is the time to strike!

Third, demand is high, and supply is low. Fellow Brit James Pollen from Knight Frank says a key challenge is “stock availability.” The market is hot but not sizzling, and the high demand for rentals buffers this. It is a good market to get into and a good time to do so.

European Competition

As mentioned above, although the U.K. and the United States currently rule this space, other European destinations have their eyes on the crown. Companies such as Fizz (present in Germany, the Netherlands, and Austria) are starting to mix students and young professionals in the same buildings. Other developers are following the U.K.’s strategy and focusing only on students.

Student housing stock is limited all over Europe and demand is rising. For example, Holland has seen a 164% increase in international students in the past ten years. While in Germany, the student housing market has grown by over 28% and continues to grow.

In A Nutshell

Investing 59,950 pounds (US$83,000) on a property in the U.K. is an affordable way to get your foot in the door of one of the world’s leading real estate countries. Earning pounds sets up any investor perfectly. With U.K. property in your portfolio, the world is pretty much your oyster.

The U.K. student housing market is strong and shows no indications of slowing, despite what some consider ridiculous rental prices and a worrying Brexit, for several reasons:

  • Non-EU students continue to flow into the U.K. from all over the world (lots of Chinese in particular), and they have money to spend;
  • The caliber of the universities still impresses so students want to spend their money in the U.K.;
  • Lastly, Brexit simply hasn’t affected universities and thus the associated housing. It is still business as normal.

Sometimes it is not the price of the product that matters. It is the wealth of the customer.

Samantha Russell