Appeal of the PBSA sector holds up

Nathan Goddard: What is the single biggest challenge the purpose-built student accommodation (PBSA) sector has faced over the last six months?

John Kenny: All our emergency response procedures were tested. Over April and May, we were managing requests from release for contracts and returning rental funds, but also maintaining and heightening our operations in-house to protect the welfare of those who stayed with us, which in our case was greater than 50% occupancy, while simultaneously letting up for the year ahead. That included pivoting all our sales and marketing processes and practices. But I believe our collective response has actually been a really, really strong one. We have demonstrated that this is a very mature and capable sector and I firmly believe the sector is enriched for doing it.

Kate Forester: I think the single biggest challenge has been how to plan and predict. Everyone wants to know what the teaching methods will be and whether students will rebook and honour their commitments to us. That is something the sector is challenged with every year, but this year was unprecedented in terms of unpredictability.

Jeannie Wong: The question we have been getting since the pandemic is: what is happening with international students? Are they coming back? Will they ever come back? A lot of investors were very nervous about that but as time progressed, stats from UCAS showed a very high growth in our international, non-EU applicants. There are no signs that demand will disappear. The PBSA sector is very robust and it has really good fundamentals – this remains the case.

NG: How resilient do investors think the sector is?

Richard Spencer: It comes down to the resilience of customer demand and, ultimately, cashflow generation. From an investor’s perspective, real estate has been bifurcated into two buckets: some of the more impacted and difficult sectors like retail, hospitality and even offices; and at the other end, logistics, rented residential and senior housing. The question is: which of those buckets will student housing units be dropped into? Operating performance has been stronger than I expected this year, as has international demand. Being able to demonstrate to investors that over this period the cashflows are resilient will put student housing in that second bucket, and investors will therefore continue to ascribe tight cap rates to the sector.

Steve Grant: There will be a couple of years of disruption. Everyone has some void in their portfolios and probably will have going into 2021-22. But I believe the occupational demand and rental growth will come back in the medium term. Perhaps surprisingly, we would also like to see the return of a well-functioning banking market. Clearly, there is currently a very favourable competitive backdrop, but a strong banking market is the oil the machine needs to function well.

Richard Simpson: Generally, pre-Covid, this has been a bull market over the last 10 years. A lot of investors were looking to get exposure to the sector and, while you always want to invest through the best possible platform, getting exposure to the market was key. The really big difference with Covid is we are seeing a lot of investors talk about the alpha – the ability to outperform the market. This will insulate against the increased risk profile, which is undoubtedly here because of Covid. So more than ever, it is very important to get things absolutely right.

NG: Will we see a slowdown in new development activity?

Niamh O’Connor: We remain upbeat about the sector. Transaction volume is still there; it might be slightly lower than where it has been, but long-term institutional investors still see a lot of resilience in the market. We are not seeing any transactional distress; banks are not pulling the carpet from under people. Part of the reason we are still active is we see the recovery period coinciding with construction periods. If you have a two-year construction period, we think the market will have actively recovered from Covid and there will be pent-up demand that will need to be fulfilled for the academic year in 2022-23, for example.

SG: Schemes are still stacking up economically and we are seeing strong profitability. People have got two main challenges: have the developers got the stomach for it in the current environment and, probably more importantly, have they got the capital for it? The development market is bifurcated into big operators and small to medium-sized operations. Frankly, I think the big businesses with more access to liquidity and credit lines have much deeper pockets, but many of the smaller guys do not have access to that capital. They have been reliant upon a much more robust and open debt-funding market, which as we know has dried up.

Tim Butler: Investors are more cautious; relatively few high street banks are open for new businesses, in particular for development deals. Those that are open are scaling back on the loan-to-cost levels to the lender, and they are looking for more substantial recourse guarantees for the borrower. There will also be further flight to quality. We are seeing that investors and developers are closed to anything but tier one university markets. While uncertainty remains, it is very challenging to fund anything in tier two or three markets.

NG: What single design change do you predict in the sector because of Covid?

Will Rowson: It has raised lots of different aspects that we all knew were there, but it’s just highlighted them. One thing I think it will drive is more studios – changing the cluster studio balance in buildings so more students can live on their own.

NO: I agree to a certain extent, but I think that is a bit of a knee-jerk reaction for what we hope is a short-lived issue. And it does in some ways contradict the social aspect of ESG.

I think putting Covid to one side, what we are really focusing on is that all local authorities are looking towards net zero. Two-thirds are endeavouring to hit 2030 as their target date for carbon zero, and some have pushed that to 2025. So now is the time that we need to start working up methods to deliver carbon zero within our projects, and it really should be at the forefront of innovation design. It is actually a triple win because it hits policy objectives, young people are increasingly conscious about the environment plus investors want to hit big ESG targets.

Gina McMorran: We have seen quite a big trend of students wanting to make space their own. At CA Ventures, for instance, we put washer dryers in units; we do not have laundries. This is a huge selling point at the moment because of hygiene concerns, obviously, but it also follows a wider trend of students just wanting to be a bit more grown up and wanting to have control over their own space. We also think IoT [Internet of Things]and touchless technology will be increasingly important.

NG: What is the single biggest opportunity we must grasp in the PBSA sector?

Richard Spencer: The opportunity to capitalise on the differentiated value proposition of PBSA relative to students’ other accommodation options has never been higher. The white space in this industry is convincing the second- and third-year users of HMOs [houses in multiple occupation] or PBSA alternatives that PBSA is a better product at a better price point with a better experience.

JW: I think we are seeing the importance around the consolidation play and building a bigger platform. We have seen a lot of smaller operators struggling during this time with bridging temporary cashflow or dealing with equity problems, while large operators have actually been able to push things forward and home in on what we need to do from a marketing perspective.

NG: We have really exciting times ahead as a sector. For really well-run PBSA operations, this is our time.