Student Accommodation - as safe as houses?

Purpose–built student accommodation is deemed as a stable and viable market. However, as Kate Finch, Solicitor of Veale Wasbrough Vizards considers, it will take more than private sector investment to disrupt the domination which the private landlord still has on the world of student accommodation.

When the commercial provision of student accommodation emerged in the early 1990s few would have imagined its impact over the course of the next two decades. According to recent research by King Sturge the purpose built private sector provides accommodation for 9.7 percent of full time students in higher education and has an estimated capital value of £7.5 billion. Today the sector is recognised as an asset class in its own right to the extent that Investment Property Databank (IPD) has recently presented a proposal for a student housing index to launch later this year. The sector has survived the recent economic uncertainty, coming through with a reputation as a relatively stable and secure market for investors, one with the potential for rental uplifts and good covenant strength. Ian Scott, Fund Manager of iQ's student accommodation fund says "whilst it would be wrong to suggest that the UK student housing sector has been unaffected by the recession it has been remarkably resilient, with a peak to trough fall in values of half that of the wider commercial property market. There have also been no significant failures in the sector, a reflection of the more stable nature of the cashflow generated by a highly diversified customer base less linked into the UK economy".

The first decade of the 21st century saw significant growth of 33 percent in the student market largely due to the previous government's initiatives to increase the number of students attaining university degrees. The weak value of sterling against the euro and the US dollar has probably had an impact on the recent increase of overseas students studying in the UK. Together these factors have led to a student population explosion and today the number of full-time HE students in the UK exceeds 1.5 million.

Universities are increasingly aware that student accommodation is a key component in the overall lifestyle choice students make when choosing a university and wisely recognise that their accommodation offering needs to be attractive to prospective students. It's acknowledged that accommodation features high after academic reputation, course availability and location. The demand for purpose-built accommodation is coming, in the main, from first year and international students who have most to benefit from the extra services and pastoral care that professionally managed student accommodation tends to offer. Overseas students, with their promise of payment of full, unsubsidised fees are an attractive proposition for universities but this group in turn expect premium accommodation. Our universities must find ways of upgrading and maintaining high standards of both residential and non-residential buildings if they are to maintain their advantage over international competitors.

As suggested by Ian Scott, commercial providers have not been immune to the financial uncertainty of the last two years but there now seems to be a sense of renewed optimism, albeit against a background of tougher funding, increasingly demanding environmental needs and stringent (and sometimes inflexible) planning requirements. Not surprisingly, in London more than anywhere is the demand for premium accommodation widespread and there's evidence that private developers are taking advantage of the Capital's high demand, low supply student accommodation market. Despite this, expectations are that the number of private sector beds coming onto the market will remain lower than the annual increase in new additional students. This will result in a continued shortage (estimated by Savills at 22,000 bedspaces over the next five years), which in turn will place greater pressure on the lower end of the private rented and HMO markets. Such a deficit is not limited to London and has been identified as affecting several UK regions. In its Student Accommodation 2010 report Savills states that "London universities can only supply 36 percent of the bed spaces required to meet their accommodation needs. This is compared to a national average of 65 percent".

The new coalition government's £6 billion savings plan has backtracked on the previous government's commitment to make £270 million available in 2010/11 to fund extra university places in areas such as science and maths. This had been expected to create 20,000 more places from this September but there will now only be 10,000 additional places available this year and the government has confirmed that funding will only be for one year with second and third year funding from universities direct. It seems that now more than ever universities will need to consider the transfer of non-core services, such as student accommodation to private operators, to focus on their core activities of teaching and research. In addition, research by the Higher Education Funding Council for England indicates that the majority of universities have a high proportion of stock which is dated and in need of investment. This may also act as a catalyst for universities to seek private sector investment. We may well see universities seeking to form joint ventures with the private sector to enable the provision of high end accommodation in good locations, joint ventures which if properly managed will overcome development hurdles and reduce risk to both parties.

Ian Scott acknowledges that "whilst an environment of significant academic funding cuts suggests that growth in student numbers cannot be other than constrained in the future this will give further impetus to public private partnerships that will favour the larger better funded private sector providers like iQ. It should also lead to new ownership and investment arrangements on university assets other than student accommodation which, after all, comprise only 5 percent of the university estate."

It is clear that commercial providers are welcome and essential players in today's student accommodation marketplace. Purpose built student accommodation provides benefits beyond the immediate site specific issues, for example releasing HMOs back into the mainstream housing stock to increase family housing units, which in turn has the additional benefit of increasing Council Tax revenue. What is equally apparent is that it will take more than the current volume of private sector activity to disrupt the domination which the private landlord still has on the world of student accommodation. This is a marketplace where there clearly is room for both and in which both are needed to satisfy the varying demands of today's students. Some students want high quality rooms with ensuites and broadband whilst for others quality is much less important than low cost. With private sector developers traditionally focused on the premium end of the market the private HMO landlord need not fear yet for his dwindling customer base.

For more information please contact Kate Finch, Solicitor, Veale Wasbrough Vizards on 0117 925 2020 or by email at kfinch@vwv.co.uk