Record investment into UK student market, despite economic uncertainty

During the first nine months of 2022, just under £3.1 billion was invested in the UK purpose-built student accommodation (PBSA) market, across 54 sales.
Written By:
Oliver Knight, Knight Frank
2 minutes to read

More than £4 billion was invested in the final quarter, largely accounted for by the sale of the Student Roost portfolio to Greystar for £3.3 billion. It took full year investment for 2022 to a record £7.2 billion.

Such a strong year for investment does hide the challenges faced by the market, particularly in the second half of the year. Persistently high inflation, rising interest rates and a spike in financing costs have introduced an element of caution and meant that transactional activity slowed in Q4.

Deal volumes are expected to pick up again in 2023 with the counter-cyclical nature of the student market in times of economic stress – student numbers often rise in recessionary periods as people look to up-skill – and the growing shortfall of student accommodation in the UK, underpinning the investment case.

Strong operational performance

During the pandemic occupancy within all types of student accommodation suffered. This has since recovered with students returning to university campuses in greater numbers and a more normal pattern of enrolments. Unite, the UK’s largest owner, manager and developer of PBSA, reported that for 2022/23 it had let 99% of beds across its portfolio, ahead of its previous expectation of 97%. Outperforming occupancy rates are a shared trend across most established schemes, with many operators now running substantial waiting lists in key markets.

”It would be amiss to suggest 2022 passed by without any headwinds; a sharp increase in debt costs resulted in a softening of yields in the closing quarter. We expect a period of exploration for yields in 2023 as these headwinds settle.”

Rising student numbers and rents will support investment

As we enter 2023, the continuation of the thematic shift by investors towards beds across Europe coupled with healthy student enrolments and the keen focus of UK universities to enhance their global positions, all bode well for the market. The structural misalignment between demand and supply will continue to underpin the sector with key themes such as the issue of affordability at the forefront of occupier challenges.

High participation rates of both home and overseas students, combined with a growing cohort of UK 18-year-olds, and an ongoing shift of student sentiment towards PBSA, also means rental growth prospects look positive. The strongest future rental growth will be in markets where the balance of demand against supply is widening. We expect that rental growth for the 2023/2024 academic cycle could exceed 5% on average across the UK.

A period of exploration for yields

Whilst the underlying drivers for investment into student housing remain strong, and the weight of capital looking at the sector is substantial, the more challenging economic backdrop and higher financing costs for buyers reliant on debt resulted in yields softening in the final quarter of the year, rising between 25-50bps since October. We expect there may be a further softening this year, with greater stability and yield compression expected from 2024.