We are almost at the end of 2021 and the Student Accommodation market is gradually recovering from the impact of the pandemic that hit particularly hard specific parts of the sector last year. StuRents, involving several experts and industry professionals, provided an insightful report about the current condition of the UK market in 2021.
So let’s go through the highlights and main points of interest to draw a picture of the current market and its potential development from now on into 2022.
HMO and PBSA
The first interesting data is the significant difference in the development between HMOs and PBSAs from late 2020 throughout 2021.
Demand for HMOs has not been affected as domestic students enquiries remained stable. On the other hand, due to the increased uncertainty for international travel, as well as teaching methods in university, the PBSA market suffered through the whole period to recover only late this year. According to the graph, demand started quickly picking up from July on, which is a positive signal also for the next semester, granted that the holidays don’t bring another spike in the number of cases.
Monthly Enquiry Share by Accommodation Type
Overall, the market kept growing with 23,000 more beds added throughout the year for a total of over 700,000.
The trend is reflected also in the prices. HMOs in the UK, excluding London, average £104 per week with a 3.4% growth YoY, PBSAs instead while being pricier, at £158 per week, have grown by just 0.2% compared to the previous year. The difficulties in the sector are most likely what caused the significant number of deals completed in 2020. A report by Savills, in fact, claims that 2020 was a record-breaking year for the PBSA sector in terms of investments. This was mainly due to the biggest one of all, worth £4.66 billion with which Blackstone acquired IQ Student Accommodation from Goldman Sachs and Wellcome Trust, along with other properties.
According to Statista, London remains the most expensive city when it comes to PBSA with an average rent price of £238 pppw, and the overall sector is recovering and it is expected to keep growing, especially in certain cities. This is likely the main reason that makes it so attractive, even if some locations are almost saturated. Even without taking into account the huge Blackstone deal, 60% of the capital to complete the remaining deals in 2020 came from abroad.
2020 investment in UK PBSA by source of capital
Another consequence of the pandemic and the lockdowns has been the consolidation of the market. With smaller players struggling and merging with or being acquired by bigger investors.
Industry’s risk contributing factors and potential solutions
On StuRent’s report, experts claim that to make the situation even more complex, the construction sector went through a record surge in the prices of raw materials such as steel, wood, and bricks because of the sudden jump in demand as lockdowns eased. This led some developers to delay or simply halt specific projects waiting for the prices to settle. Naturally, not delivering on some pre-determined targets might increase holding costs and eventually cause pressure on rents and operating budgets.
Luckily, in this case, modern construction methods such as modular solutions can offset these risks. As we discussed in Modular Construction: How to develop Efficiently, the UK market for prefab modules has been growing consistently and forecasts say it will keep growing in the coming years with a compound aggregated growth rate of 6.5%.
A linked factor to the rising costs of raw materials is also the imbalance of demand and supply for shipping containers. In just a few months, a 40-foot container shipping cost has soared from $2,000 to over $9,000 (Financial Times) due to excessive demand. Where many containers remained empty for the good part of 2020, the sudden increase in demand created serious bottlenecks sending prices to record-heights. The trend reported by the FT at the beginning of 2021 has been confirmed in the following months as well by other media outlets.
In some contexts, however, this situation might represent an opportunity. Sourcing materials, or even part of them locally, can help companies offset these costs and create a virtuous circle for a more sustainable supply chain.
Last but not least, another factor connected to China could significantly affect the market performance. It is the increase of Chinese students entering the UK.
The flow of students from the Asian country has been the major contributor to the growth of the PBSA sector. It reached 29.2% of non-EU acceptances in 2020, with India following as the second with ‘just’ 8.8%. Despite the growth of Indian students, the demand from this group will likely be very different due to the significantly lower average income per capita compared to that of Chinese nationals.
Share Non-EU Acceptances by Country and Number of Overseas Chinese Students
While the number of Chinese students is expected to keep growing, overreliance on that single market can represent a serious risk, especially considering that in 2019 their number grew by 6.5 which is significantly less than the double-digit reached consistently during the previous decade. The improving Chinese institutions that aim at attracting more and more talent both national and foreign could eventually end up changing this trend and in turn the demand for high-end PBSAs.
All in all, while the sector seems to be on the way to full recovery, there are several factors that could influence the results or even change the direction of the market. From the risk of oversupply both due to market saturation or decrease in the main sources of international students to continued high prices for raw materials and shipping. The excessive development of the PBSA sector over HMOs in some areas, with average prices over the financial means of local students, could cause also a shortage of options for this group.
On the other hand, increased competition could create positive conditions for a varied offer for different students groups, and the changing conditions can lead to alternative and more sustainable solutions both in terms of construction and supply procurement. Also, the increasing foreign investment is a clear indication of the appeal of the UK market and its positive long-term outlook.