How pension funds turned student accommodation into a cash cow
student halls
The squalor of student flats used to be considered something of a rite of passage, as epitomised by the crumbling walls and dirt-coated kitchen appliances in the iconic TV series The Young Ones.
However, the chaos and filth glamorised by the surreal 1980s sitcom is no longer in vogue for Gen Z.
Unlike the shared houses of old, student accommodation is fast becoming the domain of luxury rather than rodents, consisting of cinema rooms and yoga studios.
Underpinning this sea change is a wave of institutional investment, as pension funds increasingly replace buy-to-let landlords in the student rental sector.
Driving this shift has been the attraction of high occupancy rates and strong rent growth, as institutional investors pile into managed student halls, known as purpose-built student accommodation (PBSA).
This injection of cash has led to an explosion across the industry.
In 2004, there were 61,000 privately owned PBSA beds, according to JLL property consultants. Today, there are 412,000 – a growth rate of 575pc.
By contrast, the number of university-owned student beds has climbed by just 12pc to 353,000 over the same period.
Collectively, these managed properties are worth around £70bn, according to CBRE, housing around a third of the UK’s two million undergraduate students.
A further third live in the private rental sector, primarily in so-called HMOs (houses in multiple occupation, better known as house shares), while the remainder live with family.
However, this landscape will look dramatically different over the next decade, says Bill Hughes, global head of real assets at Legal & General Investment Management (LGIM), which manages investments worth around £1.2 trillion.
He says the rise of purpose-built student properties comes alongside the long-term decrease in buy-to-let investment, as landlords exit the market amid dwindling market share.
“It will be something like PBSA will double and HMOs will halve – it will be that order of magnitude,” says Hughes.
LGIM first began investing in the sector in 2011 and today it manages PBSA investments worth more than £1.2bn, and has big plans to grow.
At the end of April, LGIM announced the purchase of two PBSA properties worth a combined £122m, which marked the launch of its L&G Student Living Platform.
This represents a major change in strategy to managing properties directly, says Hughes, as LGIM aims to expand its student properties’ portfolio to £1bn in the longer term.
A growing shift into student rentals comes after Covid wreaked havoc on commercial leases, forcing pension funds away from traditional real estate investments such as shopping centres.
Aviva Investors has around £1bn invested in PBSA, including £300m it has invested in the last 12 months, says James Stevens, head of investment in global real estate at Aviva Investors.
Meanwhile, Axa Investment Managers bought its first PBSA block in London in 2022, boasting €3.5bn (£30bn) of student accommodation assets across eight countries.
According to Jonny Long, head of corporate real estate at Investec, pension funds have joined a growing list of investors seeking to cash in on PBSA returns.
Singapore’s sovereign wealth fund GIC announced in 2022 that it was entering into a joint acquisition of Student Roost, the UK’s third largest PBSA provider.
This is just one major example, says Long, as he sees high-net-worth individuals and family offices also targeting smaller PBSA schemes.
Unite, Britain’s largest private PBSA provider, has a record pipeline of student beds worth £1.3bn across cities including Nottingham, Edinburgh, Bristol and London.
Industry insiders say underpinning this wave of interest is the temptation of reliable returns and the imbalance between supply and demand.
“It has become pretty gold standard,” says Lizzie Beagley, head of UK PBSA at Savills. “It is a very reliable asset class. If you have 300 tenants and one goes bust, you can replace them the next day.”
Student accommodation has massively outperformed other property investments in recent years.
In 2023, student accommodation assets generated average returns of around 7pc, compared to an average loss of 11pc across all commercial property assets, according to CBRE.
Over the last six years alone, Britain’s student population has swelled by around 400,000, hitting a record high of 2.8 million in 2021-22, including postgraduate students, according to the Higher Education Statistics Agency (HESA).
The supply of accommodation has not kept up as a result, with PBSA occupancy rates typically at 98pc or 99pc.
JLL estimates Britain needs to build between 70,000 and 320,000 PBSA beds to cater for current levels of demand, assuming no further growth in student numbers.
However, the number of undergrads entering higher education is unlikely to drop any time soon, experts believe, as the population of Britain’s 18-year-olds will increase by 124,000 by 2030.
“PBSA gives repeatable, recurring income that gives you an inflation hedge,” says Stevens.
This is because providers can reset the rents every single year, says Long: “That’s not possible in other real estate asset classes where you might sign a 10-year lease.”
And demand is predictable. “Students are perhaps one of the most easy-to-define subsets of demographic profiling,” says Whitten.
“We’ve got a spreadsheet here that lists all of the higher education organisations around the UK and how many students they want to have in their facilities each year,” says Hughes.
Meanwhile, the surge in demand for purpose-built rental flats has coincided with a drop-off in the private buy-to-let sector.
“PBSA has a crucial role to play in meeting demand for accommodation as HMO landlords leave the sector at pace,” says Joe Lister, chief executive of Unite.
Between 2019 and 2022, the total number of HMO licences shrank by 4pc – equivalent to the loss of up to 80,000 student beds, according to CBRE.
But compared to a room in a flat-share, PBSA is significantly more expensive. Median weekly rents for an en-suite room in a PBSA “cluster” flat in 2022-23 in London cost 53pc more than a room in a privately rented house share.
The Government’s buy-to-let tax crackdown, which has removed tax relief on buy-to-let mortgages and introduced a stamp duty surcharge on buying additional properties, has squeezed the small-scale investors who typically own HMOs. “Being a dinner party landlord, as I call it, is no longer as appealing as it used to be,” says Long.
These changing dynamics are being reflected across cities, says Hughes: “What is effectively happening is that the expensive, badly managed real estate is being driven out of the market and being replaced by something that is better managed and better quality.”
According to Stevens, he says: “The standard of living that was acceptable 20, 30, 40 years ago is just not acceptable now.”
However, there is a question of cost, as rents for studio flats in PBSA units are comparable to those available in the private rental sector.
In 2022-23, a studio PBSA flat in London let for £259 per week, compared to an average of £254 per week for a privately rented studio in a similar area, according to CBRE.
Even so, analysts argue that PBSA can offer much better value as prices include utilities, communal spaces, management and often a degree of pastoral care.
To overcome this issue of price, PBSA providers are making a push to appeal to parents rather than students.
“Companies are telling me ‘we sell to the parents, not to the students’,” says Anthony Codling, managing director at RBC Capital Market.
While the sector has grown massively in recent years, it is now grappling with high interest rates and a national drop in deal-making.
Between 2016 and 2022, annual investment in the sector more than doubled to £8.2bn, according to JLL. This slumped dramatically in 2023 to £3.3bn.
Part of the squeeze stemmed from delays in the planning system, as the number of beds granted consent in 2023 hit a five-year low.
However, analysts are bullish about the future outlook of the sector, particularly as the prospect of rate cuts could serve as a springboard for future investment.
This optimism will drive a growing substitution effect in the industry, Hughes predicts, as he says there will be a “rotation” from buy-to-let landlords to pension funds.
He says: “Will there be house shares in some form or other in the future? Yes, but they will be a significantly declining part of the market.”
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