Student housing: supply and demand gap widens
Demand for accommodation is increasing as students make their preference for in-person study clear by returning to campus, reports Nicol Dynes.
Purpose-built student accommodation (PBSA) has shaken off any negative fall-out from the pandemic and is experiencing growing demand across Europe, experts have told Real Asset Insight.
“It is clear that demand is growing faster than supply,” says Rainer Nonnengässer, executive chairman of International Campus. “The effects of the pandemic are disappearing and international travel is picking up. There is a double effect in the market – occupancy rates have increased because of students who deferred their studies, plus the normal intake.”
The gap between demand and supply remains wide, in spite of a lot of construction and investment activity in the market. Last year, 181 new properties were delivered and more than 50,000 beds added, but there is much more to come.
According to Bonard research, 200,000 beds and 850 assets are planned or already under construction in the UK and Continental Europe.
“It’s a very strong market to go into and it presents a huge opportunity,” says Richard Pilkington, senior managing director and head of European real estate at Cain International. “But in order to find the opportunities, you need to have people on the ground and you might have to consider going up the risk curve and taking on planning and development risk.”
The need for speed
With land prices increasing and building costs rising, many developers have turned to offsite design and construction methods to speed up delivery times.
“Our prefab solutions and modular technology have been in such high demand from PBSA investors that we now have a dedicated factory,” says Jake Jephcott, chief development officer, at Vivia. “We have multiple projects and strong pipelines on a pan-European scale.”
‘The imbalance between supply and demand is unquestionable. We now get more calls from investors wanting to enter the market than from people wanting to sell.’
Samuel Vetrak, Bonard
The buildings can be quickly adapted to market requirements, but they can also stand the test of time, he says. “We follow the trend, adapting and playing with the dimensions. Gone are the days of a box with a mattress: the standard required is high and the product is akin to a very good hotel.”
The need for speed has made offsite construction a very strong market. “In such a competitive market you must be quick to find opportunities. The speed of decision-making is crucial,” says Samuel Vetrak, chief executive of Bonard. “Modular building is interesting because it saves six to nine months, which can be critical.”
A resilient sector
Even in 2021, when there were still travel restrictions, occupancy rates were on average 94%, with peaks of 99% in Belgium and Italy, according to Bonard data. This shows how resilient the sector has proved to be.
“Since October 2021, we have returned to 2019 occupancy levels almost everywhere, if the product is right,” adds Vetrak. “The imbalance between supply and demand is unquestionable and it’s everywhere in Europe. We now get more calls from investors wanting to enter the market than from people wanting to sell. It used to be the other way around.”
Students have voted with their feet, making their preference for in-person study over online learning very clear. “Even during the pandemic, the shortfall in international students was compensated for by intra-Europe students,” says Nonnengässer.
Investors have responded to the demand. The average deal value per bed in Europe has increased from €119,520 in 2019 to €140,337 in 2021, according to Bonard research.
The sector has become highly competitive, notes Nonnengässer. “We’ve done €700 million of transactions since last year, and it was quite a challenge to get there. We aim to reach 10,000 beds by the end of the year, and hope that 2022 will be as good as 2021.”
‘There is a double effect in the market – occupancy rates have increased because of students who deferred their studies, plus the normal intake.’
Rainer Nonnengässer, International Campus
The PBSA market is becoming more competitive as new and established participants chase opportunities in the sector. “There is more capital coming from institutional investors keen to deploy capital in a resilient asset class,” says Martin Varga, head of real estate business development at Bonard. “Rents have been increasing across all jurisdictions, by double digits in some tier 1 cities.”
According to Bonard data, the local student population has increased in 64% of European cities, while international student numbers have gone up in 80% of cities.
Yet the provision rate in Continental Europe is 16%, half of what it is in the UK, so there’s a long way to go before market saturation is reached.
The demand is clearly there, but developing PBSA or buying a portfolio is not easy. “We have to compete with resi developers, senior housing developers and so on,” says Nonnengässer. “Everyone is after a slice of the cake, as it were. Our strength is that we are structurally set up to act across borders, be flexible and adapt to market trends.”
Construction costs as well as operational costs are also increasing, but high occupancy rates and rental growth make the investment viable.
“We’re trying to build a pipeline, but it’s a very competitive market and you need to be there on the ground to access opportunities,” says Pilkington. “If you can find the sites and build a portfolio at scale with ESG credentials from the ground up, then it’s a great opportunity.”
Cain International recently established a joint venture with Fusion Students to create a PBSA portfolio worth £1.5 billion, with 10,000 beds in the main university cities in the UK.
Developing assets is easier than repurposing them, Pilkington says. “It is challenging to turn existing assets into ESG-compliant ones. You need to have a long-term vision and see it as an investment rather than a cost.
‘With increasingly stringent ESG criteria and higher expectations from students, there is a significant opportunity to bring more high-quality products to an increasingly undersupplied market.’
Richard Pilkington, Cain International
“But there is a lot of antiquated stock that will have to be replaced, because some assets are too old to be worth investing in.”
The divide between new high-quality products in prime locations and older student accommodation that was built years ago with different criteria will become ever more stark.
“First-generation PBSA built at the beginning of the century, with many shared rooms, will have a problem,” says Nonnengässer. “There was already a shift towards single rooms before the pandemic, but covid has reinforced that trend.”
Sustainability in demand
Sustainability is another requirement that students as well as regulators and lenders increasingly demand.
“With increasingly stringent ESG criteria and higher expectations from students, there is a significant opportunity to bring more high-quality products to an increasingly undersupplied market,” says Pilkington. “The research tells us occupancy levels, which are already high, will rise even further because of the demand/supply imbalance, so the outlook is pretty positive.”
Given the level of interest in the sector, Bonard expects the consolidation trend to continue, as most participants are still relatively small. Out of 196 portfolios in the UK and Europe, only 13 have more than 10,000 beds and only 19 have more than 5,000 beds.
“Co-living is becoming more of an institutional product as well,” says Varga. “We see a trend for more hybrid platforms, with students and young professionals under the same roof.”