Time to move the spotlight away from PBSA?
James Hood Student Housing
Whilst the vast majority of student property research and subsequent statistical analysis relates to new, purpose-built student accommodation (PBSA), there is a significant and thriving student market outside this sphere.
Houses in Multiple Occupation (HMOs), converted student blocks, and smaller and older PBSA are all examples of student housing critical to the composition of accommodation in any student town or city. This aspect of the market is regularly trading to an array of local, national and even international student housing investors, who see opportunity beyond large-scale PBSA. This is often referred to as secondary student housing or, more recently, boutique student housing.
Secondary student opportunities are far more accessible to investors, opening up a far-reaching and often diverse buyer pool. For example, HMOs can be acquired on a micro or macro level with smaller and often older student blocks varying in value from £1m to more than £20m. This is in stark contrast to large-scale PBSA, where financial entry levels are far greater. Most PBSA deals involve portfolios comprised of hundreds of bed spaces, forward commit and forward fund structures. So, the process for getting a project off the ground is highly complex, involving a multitude of professional advice. Moreover, it can be proportionally expensive to mobilise large-scale deals.
Conversations with residential landlords about the benefits of secondary student stock and HMOs often end with discussions about the viability and expense of older student property. This is real estate that most likely requires immediate capital expenditure to get it up to scratch and on par with the competition — especially as these markets mature. Furthermore, changing demand often leaves older student property partially ostracised from the local market. As a result, this type of property often arouses nervousness amongst investors.
Nonetheless, there is still a place in the market for older accommodation. A recent student survey highlighted the importance of value for money, with 97% of students pinpointing affordability as a key factor when deciding where to live. With student course fees higher than ever before, universities are under immense pressure to provide affordable accommodation options.
It is difficult to offer students lower rents for newer PBSA owing to increasing build costs and the knock on effect on rents charged to students. In order to make appraisals for new build accommodation work, rental levels in excess of £145p/w are required as a minimum. This is a base figure and it is quite often more.
Allsop’s piecemeal sale of the Prospectus Portfolio, comprising a total of circa 1,300 beds across older converted and purpose-built blocks, most of which were considered affordable accommodation, demonstrated that this type of portfolio has a place in the market. Interestingly, the portfolio was broken up and sold to a number of operators, highlighting demand for bite-size investments, as well as interest from private local and knowledgeable investors seeking new or further exposure to the student market.
Landlords must bear in mind that secondary accommodation is not competing with PBSA. This is emphasised by the sale of two student blocks in Plymouth. The supply pipeline of PBSA is notably high in this area and student numbers have reportedly dwindled. However, this did not prevent the sale of one secondary block comprising 45-beds arranged in cluster flats and a second block of 22 self-contained studios. Both opportunities provide affordable accommodation and are therefore not ompeting with large-scale, newer PBSA. Similarly, historic occupancy across both properties was strong, and investors recognised the demand amongst the student population for accommodation outside large-scale PBSA.
Moreover, local trends and demographics within certain student markets can change over time. A good example is Eaton Green in Luton, which was starting to fall behind other newer blocks in the area — in a market where supply had arguably outstripped demand. A former student block comprising 155-beds, Eaton Green was fully refurbished, having gained C3 planning permission, and let to Mears PLC with an underlease to Luton Council for a term of ten years.
Councils are under severe pressure to provide housing and this demonstrates how older student accommodation blocks can be repositioned with a new purpose. The secondary effect of this long letting in Luton is the attractiveness of this block if sold as an investment: as a long secure income asset, it is currently a very desirable product. Accordingly, Eaton Green quickly sold for around £13m — a result that is equivalent to, if not higher than, the value attainable as a student investment.
The historically unloved secondary student market is gaining traction with a wider investor audience.
There are a number of reasons for this. HMOs have strong bricks and mortar values and their popularity amongst the student demographic remains strong. Secondary purpose built blocks can — as demonstrated — offer viable alternative uses much like with HMOs that can be converted back to family dwellings, so there is a degree of flexibility with both. Yields are generally attractive too, outstripping both residential PRS and PBSA investment opportunities. Investors are beginning to recognise that these types of student assets can undercut PBSA rents and still deliver standout returns. This is owing to build costs and the subsequent rental uplifts for newer PBSA. The secondary market therefore creates opportunities both for affordable accommodation and excellent alternative use potential whilst mitigating investor risk.