Student housing is the bubble that won’t burst

What do you get when a private equity-fuelled feeding frenzy meets an affordability crisis? The answer is no joke for the UK’s student population.

Student property has been the sort of market that private equity dreams are made of: a sector with a structural supply imbalance, supported by resilient demand from wealthy foreign students and well-off middle-class parents who prioritise spending on their offspring’s education.

Even a downturn in the rest of the property market doesn’t look like it will do much to reduce housing costs in this area.

Private equity has piled in to purpose-built student accommodation alongside traditional infrastructure investors. Some of the prices paid over the past couple of years look pretty frothy. Last year APG and Blackstone paid the equivalent of £280,000 a bed when they bought a portfolio in London and the south east. In February 2020, Blackstone paid £4.7bn to buy IQ Student Accommodation from Goldman Sachs in the UK’s largest private real estate deal. Even as the economic outlook started to turn this year, US developer Greystar and Singaporean wealth fund GIC agreed to stump up £3.3bn for the Student Roost portfolio.

But there are a whole host of reasons for the mess in the sector, and it’s hard to imagine it getting cleared up any time soon. That is good news for investors and bad for students on increasingly stretched finances.

On the demand side, the end of a demographic dip means the number of domestic students is likely to rise for the rest of the decade. And however hostile the government’s anti-immigration rhetoric might be to international students, cracking down on the 22 per cent of students who pay 44 per cent of university tuition fees would create a funding headache for the sector that politicians would probably prefer to steer clear of.

Supply-wise, non-professional landlords have been pushed out by tougher rules on HMOs — houses in multiple occupation — as well as by unfavourable stamp duty changes, new efficiency standards and renters’ rights reforms. Local authorities have tightened planning processes because students are unpopular neighbours, particularly after years of rapid expansion of university rolls. Universities have left the private sector to pick up the slack, but rising construction costs, interest rates and inflation have stymied development plans.

That means, unlike some other commercial real estate sectors, rents are likely to keep rising — and by more than they did last year, when uncertainty over the post-Covid return to campus inhibited increases. Listed provider Unite last month forecast growth of 4.5-5 per cent in the next academic year from 3.5 per cent this year. That will help limit valuation declines — and is one of the reasons that Unite and rival Empiric have outperformed rival real estate investment trusts over the year so far.

Still, student property is still property. It might not be as cyclical as other types of commercial real estate, but valuations will take a hit from rising gilt yields and the higher cost of debt. James Hanmer of broker Savills notes that private equity has started submitting “soft bids” for assets. Deal volumes have dried up, which may bode badly for year-end valuations that will have to be done off the basis of nervous sector sentiment rather than actual transactions. The number of properties likely to be treated as “prime” — where landlords can be sure of pushing through healthy price increases and still achieving full occupancy will fall.

Supply shortages have been particularly acute in places such as Bristol, Edinburgh and Manchester. Rents there have been rising above the rate that student maintenance loans are increasing, thanks to a quirk in how those are calculated.

There is the potential for pernicious consequences for access to higher education. The average private sector rent outside London eats up almost three-quarters of the maximum student maintenance loan, according to real estate services group Cushman & Wakefield, and most students aren’t eligible for the maximum. Some of the most prestigious universities may be increasingly out of reach to poorer students who don’t live locally.

The era of cheap money created many bubbles. The issue for students is that it is hard to see this being one that bursts to their benefit.

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