At Property Partner, we have recently launched our latest property in the Purpose Built Student Accommodation (PBSA) market for funding. Located in Birmingham and with a forecast net dividend yield of 5.10%, this marks our tenth property in the sector.
You may not have heard about the benefits of investing in this alternative asset class, and how it compares to traditional real estate investment classes such as residential, office and retail. We’re excited about the direction the sector is heading, and how strong yields and potential growth of the market can make it an attractive opportunity for investors.
What’s the difference between PBSA and letting a traditional house to students?
It’s important to delineate between a PBSA asset and a regular / traditional house which has been converted for and let to students (normally described as a house in multiple occupation (HMO)). Unlike a HMO, PBSA has been designed and built specifically for university students by private developers or is a redevelopment and change of use of an existing building.
The three main classes of PBSA are:
- En suite cluster flats*
- Non en suite cluster flats
*a cluster flat is shared accommodation whereby people have their own bedroom, but share communal facilities such as central living areas, kitchens and bathrooms.
The growth of the private sector has been accelerated by a shortage of suitable existing university accommodation and a lack of funds to refurbish current stock. With most top tier universities in the UK also located in popular cities with shortages in housing for permanent residents, PBSA consolidates the needs of students for private studying and sleeping space along with communal living space. This provides a better solution for students, whilst creating greater space and cost efficiency for investors and developers, and freeing up traditional housing for those looking for long term residence. Amongst many professional investors, PBSA is already considered a mature market.
Why should I add PBSA to my investment portfolio?
At Property Partner we advocate a diversified investment portfolio, believing in both residential and commercial property as investment classes for the long term. With yields rivalling other property investment classes and the UK’s world class reputation for higher education, there is a strong case for incorporating PBSA into a portfolio.
Knight Frank reports that PBSA makes up 33% of the institutionally managed residential investment sector, with approximately 600,000 beds or units. The consultancy also reports on the efficiency of the market with a loss of only 23.8% of revenue from gross to net, lower than both PRS (at 25.8%) and senior living (at 28.0%). With Knight Frank reporting rental growth across the country and expectations for future uplift at 3.2% for London and 2.4% for the regions (annualised to 2024), there is a good level of confidence in the sector. Indeed, the value of the UK’s student accommodation sector is set to reach £53 billion by the end of 2019, with growing interest from international, institutional and private investors entering the market at different levels.
Whilst price growth in the sector has been strong in recent years, experts believe there is still value to be found. Competition in the sector is becoming more intense and investors are increasing their exposure, both being positive signs that PBSA is a maturing and stable investment. The majority of returns in the sector are driven by yield, which is still relatively high compared to other property sectors. The attraction of PBSA is part of a larger trend towards growing interest in investments which provide a strong and stable long term income stream.
Currently, Cushman & Wakefield reports that whilst yields are clearly compressing, there is still value to be found. Yields in super prime regional property are between 4.75% and 5%, with prime regional between 5.25% and 5.75%. It’s worth noting that these quoted yields are not inclusive of all costs and fees, so net returns would be lower. At Property Partner we target net dividend yields from rental income, after fees and costs, of over 5%, and our latest property in Birmingham is forecast to return just that.
Naturally, one of the central drivers behind the growth in the PBSA sector is the growth of people attending university in the UK; full time first year higher education student enrolment grew by 2.6% between 2016/17 and 2017/18 to 1,844,545, with increases amongst those studying for their first degree and amongst postgraduates.
Undoubtedly, this is helped by the UK’s global reputation for top quality universities, which helps attract international students. In its latest World University Rankings, QS reports that 18 UK universities are within the top 100, second only to the USA, with four ranked in the top 10. Up to 19% of students in the UK are international, with 42% of those studying postgraduate degrees from outside the European Union. Full time first year higher education enrolment for non-UK students increased by 4.5% between 2016/17 and 2017/18 academic years.
Over the past decade, PBSA has proved to be a reliable and consistent asset class, retaining growth in units built and investment despite factors such as the global financial crisis and the introduction of higher university tuition fees in England. Despite global economic and political uncertainty, university admissions are stable, with investment into the sector similarly consistent. Returns are attractive, even before the prospect of potential growth in capital value.
Where are the best places to invest in PBSA?
The majority of the UK’s universities are located within cities and towns that are already well served by good transport connections, are attractive to businesses and provide the cultural and leisure amenities desired by students. As such, with PBSA assets often located close to universities, the availability of a good quality of life in the locality is usually a given.
Factors such as the quality of the university within the city, and the total amount of students in the city are important considerations, whilst future campus and city development plans may attract greater numbers of students in the future. With high quality universities located in areas of the country as diverse as Exeter, Warwick, Durham and Oxford, investors can expose their portfolio to different regions of the UK with confidence. Birmingham, the UK’s ‘second city’, is home to four universities and over 70,000 students, including the University of Birmingham, (UoB) ranked in the world’s top 80 universities. The UoB is currently at the beginning of a ten year, £1 billion campus investment plan, with £365 million worth of facilities opening over the next three years. The UoB also boasts 6,500 international students from over 150 countries.
In addition, the city of Birmingham has undergone significant regeneration in recent years, including a £500 million redevelopment of New Street train station and a £150 million development of Grand Central Rail station. Over the next few years, Arena Central, a major mixed use development, will also complete.
Similar cities to Birmingham, with a large student population ratio to permanent population (because of limited housing supply) and often with multiple universities and wider regeneration plans are attractive, such as Manchester, Newcastle and Bristol. Smaller cities with single universities, such as Exeter, can also have a high number of students in proportion to houses available, causing pressure on supply. This can both cause greater demand for PBSA and sustain yields on PBSA which already exists.
The size of student accommodation properties can be prohibitive for investors to access this market directly, due to the high costs associated with buying entire blocks with multiple units; with Property Partner this process is simplified, as shares in the block are purchased instead.
How do invest in PBSA with Property Partner?
Our latest investment is a 26 bed PBSA block in Birmingham, a significantly undersupplied market, and boasts a strong yield. Invest before 10am 5 June and benefit from 50% off transaction fees giving a net forecast dividend yield of 5.10%, terms apply.
Capital at risk. The value of your investment can go down as well as up. The Financial Services Compensation Scheme (FSCS) protects the cash held in your Property Partner account, however, the investments that you make through Property Partner are not protected by the FSCS in the event that you do not receive back the amount that you have invested. Past performance is not a reliable indicator of future performance. Forecasts, if stated, are not a reliable indicator of future performance. Interest and capital returned may be lower than expected. Gross rent, dividends, and capital growth may be lower than estimated. 5 yearly exit protection, exit on platform, exit in line with a specific investment case or fund strategy, subject to price and demand. Property Partner does not provide tax or investment advice and any general information is provided to help you make your own informed decisions. Customers are advised to obtain appropriate tax or investment advice where necessary. Financial promotion by London House Exchange Limited (No. 8820870); authorised and regulated by the Financial Conduct Authority (No. 613499). See Key Risks for further information.