Why PBSA is a smart investment in 2024

Student digs; why PBSA is a smart investment in 2024

By Kimberley Gates, Director of Client Partnerships, Karis Capital

Amidst the backdrop of the numerous challenges of the UK property industry in 2023, Purpose-Built Student Accommodation (PBSA) emerged as a resilient and promising asset class. Stepping into 2024, my desk at Karis is inundated with proposals for student-led schemes, a noteworthy shift, especially from developers traditionally focused on the Build-to-Rent (BTR) market. Far from coincidence, a closer look at market trends reveals a compelling trajectory for PBSA investment, we are predicting an increase in popularity throughout the course of this coming year.

Here are some of the key reasons to consider PBSA investment:

1. Supply and demand imbalance

The most apparent of the factors driving the surge of interest in the PBSA sector is the acute lack of supply meeting ever-increasing demand. The UK student population is at an all-time high whilst the supply of appropriate accommodation is at its lowest in years, creating a significant opportunity for savvy property investors.

• Increasing demand: Although EU student numbers entering the UK has declined, students from other regions are on the rise, with UCAS reporting a 2% increase for the 2023/2024 academic year. 
• Lack of supply: Factors contributing to a shortfall in stock include planning challenges, existing stock requiring modernisation and a shift in university preferences leading to location specific surges. A number of private landlords providing HMOs, popular amongst students, also exited the market.

2. General market conditions improving

While numerous schemes are in progress, completed sites are scarce. The sector was not immune to inflated construction costs, a rocky debt market, an understaffed planning system and a myriad of regulatory updates. However, early signs of economic recovery and stabilisation in the debt market are reducing these barriers to entry.

3. Rent growth

Predictions of rent increases are supported by the forementioned record-high student numbers, resulting in the strongest occupancy rates on record and operators quickly filling schemes.  The potential extends beyond new construction sites. In a time where students expect elevated living standards, the days of settling for subpar accommodations are gone. Consequently, there is a demand for refurbishing existing PBSA stock. Properly managed, these renovations can yield higher returns for investors.

4. Locational surges

Student numbers are not increasing evenly across all campuses. Historically less sought-after universities are experiencing an influx of students due to consistently lower A-Level exam results post-pandemic. This has created an unmet demand for accommodation in low-to-mid-tier universities.

Points of caution 

Like any real estate investment, PBSA requires a specialist team from design to operations and consideration of evolving built environment trends, including changes in energy-efficient standards and building safety regulations.

Lender landscape

Appetite within the debt market for PBSA schemes remains robust, particularly with specialist lenders familiar with the asset class.

• Stretched LTVs: Our lender partners are expressing a readiness to stretch Loan-to-Value (LTV) boundaries, buoyed by market conditions.
• Experienced teams and robust plans: They are looking to see proposals featuring seasoned professional teams, a sound exit strategy, and, for those retaining stock, a specialised operator with demonstrable expertise.
• ESG incentives: PBSA projects aligning with diverse Environmental, Social, and Governance (ESG) criteria, particularly those emphasising green credentials, can enjoy favorable debt terms as lenders continue to add incentives. A trend we expect to see more of in 2024.

Specialist debt advisory

Karis is actively overseeing a portfolio of ongoing and recently completed student-led projects. Through our expertise, we have skillfully structured bespoke debt packages securing the required finance at every stage of the project to enable our borrowers to achieve a wide spectrum of goals and implement diverse strategies.

As advocates for the thriving PBSA market, we look forward to the continued opportunity to collaborate with our clients, leveraging our debt advisory expertise, to bring these in-demand schemes to life.