Student Roost and Property Week assembled a panel of experts to discuss the key issues, challenges and growth opportunities for purpose-built student accommodation in the UK.
Panel of experts
- Jeannie Wong, head of student accommodation and vice-president, investments – Brookfield Asset Management
- Heriberto Cuanalo, CEO – Collegiate
- Keith White, chairman – CRM
- James Granger, global COO – GSA
- Richard Spencer, managing director – Goldman Sachs
- Mark Allnutt, senior managing director – Greystar
- Paloma Lisboa, director of operation for estates & facilities – King’s College London
- Tim Butler, chairman – Student Roost
- Niamh O’Connor, partner – Summix Capital
- Richard Simpson CEO – Watkin Jones
- Emma Shone, deputy news editor – Property Week (chair)
Will we see continued attraction to UK purpose-built student accommodation from the global investor community?
Richard Spencer: By way of background, we’re invested in UK PBSA, recently sold a business in Australia, are invested in the US and in India. What we like about the sector, which we see resonating with many institutional investors, is that it’s an asset class that benefits from growing cash flow and certainty of yield. These combine to bring total returns that are particularly compelling when you compare them to other real estate sectors.
If you think about the UK specifically, the structural overlay is very attractive. We have an extremely strong university sector and the number of students of the right age group will increase from here on, so people see that structural demand as continuing into the future, along with a historic undersupply of high quality product. The combination of those things is a sort of macro theme - people are looking for a growth theme, have a lot of capital to invest and it is an interesting industry from a supply and demand perspective – that’s what’s driving it.
Richard Simpson: Global inflows to residential in the UK are underweight but beginning to accelerate. We know residential is pretty defensive as an asset class and has been over the past few cycles, so getting that balance of resi into the portfolio is sensible.
Jeannie Wong: I agree that it’s a defensive asset class, especially with what’s happening politically and economically. While there are an increasing number of English programmes being offered in Europe, I still think the UK stands strong as a top destination for foreign students. Coming to school in the UK is a prestigious thing to do, so its ranking will remain strong.
James Granger: For all the reasons discussed, investor appetite for the UK PBSA sector is fairly clear. We also have our own fund at GSA, which has seen more inflows from Asia Pacific. There are strengthening university sectors in emerging parts of the world and I think therefore this appetite is going to grow.
Where do the challenges lie in maintaining a profitable student portfolio?
Keith White: Operating costs are coming under pressure. Certain costs and obligations are rising. Health and safety is becoming a much bigger issue after the Grenfell Tower fire. And despite the supply/demand issue, the marketing cost and acquisition of your consumers on day one is a harder process, particularly when you see a lot of product in a single market. Also, we’re seeing more competition for staff – there’s a limited pool of people with the right skills set. Greystar kicked this off when it came into the UK by pushing salaries higher in an attempt to acquire the best people in the market. It was a perfectly rational thing to do, but everyone else followed. Keeping the lid on that is going to be harder in the next few years.
Heriberto Cuanalo: We also have to remember that the sector expects rents to keep growing. As this happens, we will have an issue with agents and spreadsheeters reducing costs and charging more, whereas, frankly, we need to professionalise the sector. It needs more investment - there are all these theoretical views about costs, but the reality is that they’re higher than people expect. We have to make sure we satisfy our customers and give them value when we become competitive, not just think we’re going to take more and more from them.
Mark Allnutt: On a portfolio level, there are going to be winners and losers when it comes to location. There’s a clear trend of students picking the better university cities. The number of 18-year-olds has been falling for 10 years - now it’s going to grow for 10 years. This trend will be huge, but that doesn’t mean it will be geographically disperse around the country. So yes, it’s about costs, but being in the right place will be more important.
JW: You also have to think about the value of your brand. Can you compare student housing to how you would look at a hotel brand? I think it’s starting to become the case that you can, and if you can use your brand and try and add to a city where you’re already well known, you might save on customer acquisition costs for example.
HC: A brand means something to a consumer. It defines a consistent experience of a consistent product. We don’t have a Travelodge/Four Seasons distinction in this sector yet - we’re still on the journey. Sometimes in this sector we only see brands as an ownership stamp.
KW: The challenge there is that our valuation and agency colleagues value that segmentation, because they always come back to their cost-per-bed matrix, rather than really understanding what it is that we do.
MA: Is that improving?
KW: They really don’t know how any of us work, in real terms. They don’t feel it, touch it or see it.
“In this sector we only see brands as an ownership stamp - a brand means something to a consumer”
Richard Spencer: I disagree - I think it’s improving. We’re able to get our point across with valuers more. We’re able to demonstrate to valuers how decisions made in pricing or operating cost or capital investment translate into cash flow performance and subsequently into valuation performance.
Richard Simpson: I think valuers’ understanding of the sector has improved significantly in recent years because of all the transactions that have taken place. A few billion pounds’ worth of management accounts have been seen and scrutinised over the past few years, so they do understand that every model is different, but nonetheless they have good regard for it.
Paloma Lisboa: We also need to ask how we can provide value for money for the people in the middle. You have the generally wealthy international students who have no problem taking high-end PBSA. At the lower end, the university supplements loans for financial support. But there is a big chunk in the middle that is a missed opportunity. It’s about trying to balance the industry’s ability to make a profit and be an asset class people want to invest in, by building and maintaining a reputation and branding that lets students know how and why we can provide them with the products, while giving them value for money. But costs will keep rising, so how do we keep meeting those two ends from a reputational perspective?
Niamh O’Connor: I think it is happening already, though not necessarily in existing stock. The draft London plan, for example, is already targeting that demographic with its 35% affordable quota. As we move out into the regions, too, from a planning perspective we’re seeing that affordability is definitely moving up the agenda.
JG: An issue in the UK more generally is our aging portfolio and the fact that, as a sector, we have been slow to adopt new technology. Also, universities are changing their expectations of operators in areas such as tenancy lengths and this is adding costs. So there’s plenty of activity that is causing us to think about how we manage this better.
How is the design of PBSA evolving?
NOC: I think health and wellbeing is at the forefront of everyone’s agenda, with a focus on community and spaces with a lot of amenities. I think this is right, but shouldn’t always be at the cost of the size of bedrooms. I think an easy excuse is that we’ll have spaces with a lot of amenities to get people out their rooms to socialise more, so they won’t need to spend time in their rooms.
PL: There’s a challenge in terms of trying to build high-quality, high-amenity buildings where space is at a premium. It’s a very difficult equation to balance. From a university perspective, it is important to work closely with partners to build the wider student experience. At Kings, we are surrounded by PBSA, but we only work with the buildings we have nominations with. But we have Kings’ students in all of them, so how do we integrate their whole experience in the city that they’re signing up for when they come to us?
How important has sustainability and environmental impact become in PBSA?
Richard Simpson: Students need to completely identify with the whole experience that comes with living in a PBSA building and the importance of sustainability has been amplified year in, year out. Unless you can demonstrate proper sustainability credentials for the building – how it was built, is serviced and run – that can really turn people off living there.
NOC: From an investor perspective too, I think it is very important that we have those sustainability credentials. We need to be having and maintaining these very high brand standards.
Richard Spencer: iQ runs on 100% renewable energy. That’s not the cheapest way to do it, but it adds value in lots of other ways. We care about it, as do our students and our university partners.
NOC: There’s a conflict between what local authorities are asking for and what operators want to build. The operators we’re working with tell us that they want to see larger clusters of beds, but local authorities tell us we won’t get planning for that. They want to see townhouses; but then we’re hearing from end users that they can’t underwrite as keenly for a townhouse, because they can’t rent it at anywhere near a similar level. So we need to bridge the gap between educating the local authorities as to what a student requires and what they think is appropriate accommodation.
HC: There is also a lot of opinion in the sector and not a lot of empirical evidence. We need to give councils more objective information, so we can collectively make sure authorities make better decisions for students.
What are the synergies and differences between PBSA and PRS?
MA: We manage around 500,000 apartments globally. Around 72,000 of those are student beds and I’m leaning towards there being more similarities than differences between the sectors. We are learning so much from generation X and their families and this is having an impact on our product. We see the most similarity in design. Both want the best, most active ground-floor spaces and give over the most valuable spaces in the building to common spaces and amenities, with a big focus on the social aspect. There are similarities with technology, too; it doesn’t matter what tenure the building is, it must have high connectivity and its management has to be extremely tech savvy.
How healthy is the sector and its stock?
KW: You get pushback from local authorities because in the planning process, the perception is that there’s oversupply. But increasingly, HMO investors are exiting the sector, so that product will slowly reduce over next five to 15 years. I’ve never seen a city where there is an oversupply of PBSA. In the end it’s about where your price point is and what your product is.
Tim Butler: I think the market’s in rude health. As long as I’ve been around, the measure of saturation has been one purpose-built bed for every two students. Liverpool is probably at that number. But is it saturated? I don’t think it is.
HC: Buying in the UK is harder than in mainland Europe, because we don’t really have any zoning rules - PBSA has to compete with residential. We can buy a plot of land in Spain and the price is defined differently, because you can only build certain things on that plot. So you’re not competing with residential prices. You’re competing with like-for-like prices.
Richard Simpson: The key theme that’s emerged since 2012 is of winners and losers. The better universities are having more success than the weaker universities and that will continue. So it’s not just about supply – it’s also about demand. You need to be clear which universities will be the winning ones and how to partner with them to continue to attract the best students.
Finally, how is the sector handling the mental health and wellbeing of its students?
JG: The discussion about wellbeing is more powerful in the UK than elsewhere - we have an increasingly mobile global student population so I think that will be interesting as time goes on.
PL: It’s a hard subject. There is this huge positive effort trying to support our students through what is a very challenging time. They are vulnerable. But at the same time, an immense amount of pressure is being put on everyone working with this demographic to provide something that perhaps we, as a sector, should consider how much and at what levels we need to provide.
”There is [a] huge positive effort trying to support our students through what is a very challenging time”
We sometimes have conversations with students who expect NHS-level support. So how do we balance those expectations and navigate what is a highly emotional issue that can put significant pressures and liabilities on those trying to provide a service in this area?
Richard Spencer: We have concluded that it’s best to make sure the right information is available to our students so we can signpost when people need help, hopefully in collaboration with universities and providing the right environment in the building.
HC: I think if it’s got to the stage where it’s gone wrong, it’s too late. We try to do lots of little things everywhere that add up - from how a student is going to use their room, to training the staff and other students to look out for signs. Once they need treatment it’s a bit out of our control. So the bulk of our effort goes into trying to make sure we don’t get to that point.
PL: When we’re talking mental health, a lot of people will think of crisis, and there’s so much more that can be done before that point to positively affect student wellbeing. Unfortunate events will sadly happen in every building at some point. But it is important that we also look out for everybody else who may not get to crisis point, but may still struggle at different stages of their university years.
HC: We do take this seriously as a sector. We can get better at it still - we know we want to, and know that we can.