A recent Investcorp report into Student Accommodation in the UK highlights a significant opportunity for investors. So we take a deep dive into the report to look at the salient points to help our customers in deciding whether you buy a student HMO or not. Here’s what we found.
Top level, the report highlights an imbalance in demand and supply is creating an attractive investment opportunity in this asset class, particularly for House in Multiple Occupation (“HMO”) student accommodation, a segment largely overlooked by institutional investors as it is particularly fragment and not large enough for the capital base that institutions have access to. This is great news for smaller corporate players or experienced landlords within the HMO market.
There are 2.2 million students in the UK for academic year ending June 2021. This is up 28% since 2014. Over the same period the UK total population is up 5% and full time international students is up 44%.
Domestic Demand – in 2020 we saw a dip in the number of 18 years going to University. However, for slightly older students (19 year old plus), there is a correlation between employment opportunities and demand for University places. When there is a recession we see higher uptake in student places, and vice versa. During covid in 2020, University places went up 13%. With the economic outlook and forecast growth in the UK looking bleak for the next couple of years, the Universities are set for bumper applications.
International Demand – the UK is home to the second highest number of top 100 Universities in the world with 17, and behind the US with 27. International students now account for 26% of all full time students in the UK, with the highest growth rates being Chinese and Indian students.
Which Universities are performing the best?
Overall, the average University has grown their intake by 4% since 2014. The report noted there are some key trends as follows:
The higher the University ranks the better the University has been able to grow it’s intake. Rankings for Universities is done by The Times, The Guardian and TEF.
Student Accommodation Supply
There are 2.2 million students in the UK. 25% of those students decide to live at home, the other 1.6 million students require student accommodation. Some cities have higher rates of living at home, for example more London students live at home than say Bath students.
For those requiring accommodation there are approx. 320,000 (20%) living in University owned accommodation which is almost always 100% full. Purpose Built Student Accommodation (PBSA) accounts for 385,000 beds which operates at 90-92% occupied. This leaves around 900,000 students requiring accommodation in HMOs (approx. 850,000 beds) and a small amount in one/two bed houses and flats (50,000).
Over the last 10 years PBSA has become a recognised asset class with 10% of the UKs total real estate investment over the last few years being invested here. The top 8 owners of PBSA control 49% of the market and has become a recognised gateway for institutional investors to gain access to the student accommodation market. Unite PLC are head and shoulders above the rest, owning 74,000 beds and just for comparison of the long tail effect of the PBSA players that the 8th largest player is SPH with only 8,300 units.
Total operating costs for an established PBSA scheme of sufficient scale are usually c. 25% of gross rent. The main items are utilities (c. 30%), staff (c. 25%), maintenance (c. 20%), marketing costs
(c. 10%), and cleaning (c. 5%). The key criteria for a successful PBSA scheme are normally:
- Catering to a growing university with international appeal
- Good location within the city
- Price point and room mix: PBSA schemes with more studios tend to perform poorly. Developers tend to build schemes with studios in an attempt to maximize income
- Minimum scale: 250+ beds
- Strong marketing capabilities
The Student HMO Sector
Due to proliferation in the student HMO market over the last 10 years, many cities around the UK have introduced Article 4 which restricts the development of new HMOs for 3 or more bedrooms/tenants and therefore need planning permission. Planning will only be granted in extreme circumstances which varies from Council to Council and would normally align with saturation of HMOs within that area.
The report deduces that most student landlords are none professionals with small portfolios and managed by local agents with varying degrees of customer service. The largest private operator of HMOs is Student Cribs with approx. 4,000 beds and We Are Kin with 1,000 beds. The investment values are completely different to PBSA with the largest reported HMO transaction of 175 beds being £15m compared to an average PBSA transaction of £40m.
The letting cycles for HMO and PBSA are different. 75% of student HMOs are let by December and 90% by March, whereas PBSA lettings begin in March with most activity taking place between June and August. HMOs are reported to operate at close to 100% occupancy with the most popular being domestic tenants.
The appeal of student HMOs over PBSA are two-fold – firstly, rents are on average 30% cheaper than PBSA and secondly HMOs provide more autonomous living than PBSA blocks. Student HMOs are also more nimble than PBSA in regards to occupancy, with 90% of student HMOs occupied during covid but significantly lower for PBSA which highlights the different tenant type between the two as PBSA are predominantly let to overseas students.
There is no set standard with utility bills for student HMOs – some are bills inclusive and some are excluding.
Below shows projected demand rates for HMO and PBSA by city over the next few years.
The Student HMO market is set to continue flourishing over the next 5 years with increased demand from overseas tenants and domestic students alike. PBSA is expected not to keep pace with demand providing an opportunity for smaller players in the HMO market.