Paragon Development Finance Senior Relationship Director Simon Dekker discusses how there is growing demand for student accommodation as university numbers rise.

The news that some universities are paying students to live in alternative accommodation in towns and cities miles from campus highlights the ongoing potential of the Purpose Built Student Accommodation (PBSA) sector.

The Financial Times reported that first-year undergraduates at the University of Glasgow, Manchester Metropolitan University and the University of the West of England in Bristol were informed that they would have to find their own rooms owing to the lack of space in halls.

It’s a situation more universities could find themselves in as the student population swells. The latest numbers from the Higher Education Statistics Agency shows there were 1.7 million full-time undergraduate students in the 2020/21 academic year, a 6% increase on the previous year.

UCAS numbers meanwhile show more than 683,650 applicants for this academic year, up slightly on last year and the second highest on record. Nearly 135,000 international students have applied, an increase of 3% since last year, with applications from China increasing by 10% and India by 20%.

Such growth creates clear demand for PBSA accommodation. Whilst the private rented sector continues to be the main provider of student accommodation in most university towns and cities, PBSA is growing and providing a complementary source of accommodation.

Analysis by Cushman & Wakefield shows there were 697,734 beds available to students for the 2021/22 academic year and just 24,612 new beds delivered for the 21/22 academic year – 25% lower than the five-year average before the pandemic – as Covid-19 slowed development.

Historically most universities have provided first year accommodation, but with increasing student intakes, many are partnering with private sector providers to house students. Many of these students continue to live in PBSA accommodation throughout their university careers.

Cushman & Wakefield’s analysis shows that the private sector continues to drive growth. The private sector delivered 85% of new schemes last year, an increase from the 80% average seen in the previous five years, whilst the proportion of beds provided by universities vs PBSA providers has shifted from 60/40% in 2013/14 to 47%/53% today.

The PBSA market is a sector we have been involved in for some time and we have certainly seen an acceleration in demand for funding in more recent years. The appeal of the market is clear – yields and income generation are strong, market demand robust and arrears are low and stable.

The areas where we have seen greatest demand for schemes is outside of the major cities. For example, we have worked with the likes of Urbanite  to deliver new beds in Leeds and Nottingham.

In February, we provided a £22.6 million finance facility to the Study Inn Group to support its 270-bed scheme in Nottingham, which utilised our ‘stabilisation’ feature. This covers the period following the completion of a development until the scheme has seasoned with student occupancy for up to two academic years.

There is also a vibrant investor market. Savills reported investors spent £4.1 billion on PBSA properties last year, with a further £14 billion of ‘dry powder’ money targeting the sector. 

That said, the sector is not without its challenges. The market for acquiring land or buildings to convert is very competitive, which can drive up the price. Second, the PBSA sector is not immune to the factors impacting all property developers currently around cost and supply of materials and labour.

However, the supply/demand imbalance impacting the student accommodation market is a long-term issue that will underpin the need for greater numbers of student beds for some time to come.

For more information on Paragon's Development Finance business, visit the webpage here.