UK student housing market seen as a resilient and stable investment

The student housing market in the UK has been a resilient and stable investment during the downturn and that is forecast to continue, according to a new analysis from international real estate advisor Savills.

Growth is expected to continue despite pressures on student demand due to increased tuition fees and threats to international student numbers through tougher visa controls.

lphs_166_main18122012114433Following weaker rents during the 2012/2013 academic year, Savills forecasts total returns of 9.3% for the 2013/2014 year with static blended net initial yields at 6.3% and rental growth of 3% due to improving demand and restricted supply coming through.

‘We are confident that student housing will continue to prove a counter-cyclical investment, but the market is not without its risks. Investors should consider investments on an institution by institution basis, remaining mindful of the city supply where there are multiple universities,’ said Marcus Roberts, Savills head of student investment.

‘Some cities will have reached maturation relative to student numbers, while some universities will be more susceptible mid term to fee increases. Over and above demand as defined by student numbers, university rankings are normally the first reference point for prospective students and a good indicator of investment risk,’ he added.

Applicant numbers are an early indication of student demand and while the increase in tuition fees up to a maximum of £9,000 per annum triggered a 6.7% fall in applications for the current academic year, numbers are up by 2.7% for the 2013/2014 year.

Demand from outside Europe has continued to grow particularly from the Far East which has seen average annual growth of 8.5% over the last six years. Figures released by UCAS show a 9.9% increase in number of students applying to UK universities from China and a 19.3% rise on those from India, suggesting that while recent student  visa reforms have tackled abuse, students are not put off studying in the UK’s universities.

Savills points out that the ability to attract the most able, internationally mobile students is vitally important to the standing of the UK’s best universities on a world stage.

Any government policy targeting a reduction in net immigration should take care to differentiate between those students attending accredited universities and those attending less well regulated educational establishments.

The Savills Student City Monitor is a combined measure of demand, student demographic, university academic rank and financial health, affordability of local rental market and the supply of purpose built accommodation.

It ranks universities from ‘First’ through to ‘Pass’ and just nine make the top grade, all well known for academic achievement, strong international demand or undersupplied and relatively unaffordable local housing markets. The top nine are Bath, Bristol, Brighton, Cambridge, Cardiff, Edinburgh, London, Oxford and St Andrews.

The report says that London market in particular will present opportunities based on the affordability measure, with private rents forecast to continue to rise, further stretching affordability and driving demand.

The Community Infrastructure Levy, which is effectively a tax on new development, is an emerging risk for the student sector.  Across the UK, Developers of student housing have not typically had to provide affordable housing under Section 106 agreements, however this is creeping in within London which is causing viability issues.

However, potential CIL costs as charged per square metre of new floor space in addition to potential S106 contributions, will make many new schemes unviable.

‘The provision of good quality, well managed accommodation is key to an institution’s ability to attract top class students. We are now working closely with developers and house builders across the country in an effort to ensure that emerging CIL rates do not impact significantly on the viability of the student housing market,’ added Roberts.