Crisis or opportunity? The UK student housing shortage

Now that A levels exams are over for another year, many 18 years olds are contemplating where they might be studying in September. The chosen course itself is of paramount importance, but location is also key. What is the local town like? Is it too far from the parental home? Is it far enough away from the parental home? Is it an expensive town? Will there be sufficient accommodation? This latter question is significant, as a number of UK university towns suffer from an acute undersupply of accommodation.

Many first-year students choose to live in purpose-built student accommodation (PBSA), generally affiliated with the university. Overall, about 30% of students stay in PBSA, but demand has grown by nearly 20% over the last decade, vastly outstripping supply. For example, in London, there are around 400,000 students, and just over 100,000 PBSA beds. The imbalance is not unique to London; Bristol, Manchester, and Nottingham all face a significant shortage of student accommodation. We estimate there is an unmet demand in the UK of around 600,000 bedspaces, and the lack of new development is exacerbating this shortfall. Only 9,000 new beds were delivered to the PBSA market last year, and a further 14,000 beds are expected this year, where the historic average is 30,000 beds per year.

This has led to substantial rental growth. Over the past six years, the average rent for an en-suite room has risen by 27% to £8,700 per year, and a studio increased by 37% to £11,950 per year. And the situation isn’t improving. Based on current projections, there are only around 59,000 beds likely to be delivered by 2029, which could lead to a potential shortfall of up to 620,000 student beds.

It’s not only PBSA that is facing supply constraints. The private rental sector is also under increasing pressure. Changes to tax relief, greater stamp duty costs, and other legislative impacts have led to a surge in private buy-to-let landlords leaving the market. Currently, new buy-to-let mortgages are around 39% lower than the long-term average. This is particularly affecting Houses of Multiple Occupation (HMO), which have traditionally bridged the supply gap for student housing. From its peak in 2018/19 to 2022/23, HMO supply has shrunk by 10%, or 48,900 dwellings, equivalent to 146,000 beds. There are now fewer HMO dwellings in 2022/23 than there were a decade ago. Private rental stock has also increasingly been converted from long-term rents to short-term holiday lets, with around 175,000 flats and houses which could be used as permanent homes now being used as short-term holiday lets.

Still, there is hope. There is a significant wall of capital targeting the Living sector in the UK. Just under £4 billion worth of investment deals took place in 2023 alone. Universities are increasingly turning to the private sector for the development of PBSA, a move that offers lucrative benefits to investors. Our UK Purpose-Built Student Accommodation Index has shown an average total investment return of 10.8% in the last 12 years. These consistently strong returns, coupled with the availability of income-producing opportunities, are attracting new and returning capital – both domestic and international. And while there are still headwinds, not least around planning and the cost of debt, we expect conditions to become more viable and we should see a return of institutional investors forward funding new developments. Leveraging this investment capital would make it possible to address the chronic shortage of student accommodation in our university sector, a problem which will only intensify in the next five to 10 years.