The Impact of COVID-19 on the Purpose Built Student Accommodation Sector as at April 2020

The outbreak of the Novel Coronavirus (COVID-19) was declared by the World Health Organisation as a “Global Pandemic” on the 11th March 2020.

Pre-COVID-19, the purpose built student accommodation (PBSA) sector was in the best shape it had ever been in. With lots of media activity surrounding the higher education sector, we recap on why the fundamentals were so strong, think about what the new post-COVID-19 landscape may look like and what this may mean for the sector.

Higher Education and Purpose Built Student Accommodation Pre COVID-19

Despite the UK throwing plenty of challenges at the higher education (HE) sector in the form of a UK 18-year old population dip, political uncertainty, potential policy changes, Brexit and immigration rhetoric, prior to the 11th March 2020 the number of students applying, accepting places and formally registering for university was higher than ever before.

  • Total registered full-time students for 2018/19: 1.85 million (up 0.7% y-o-y)
  • Total applicants for 2019/20: 706,435 (up 1.6% y-o-y)
  • Applicants for 2020/21 so far were up 1.2% compared to the same point in the cycle in 2019/20
  • Non-EU registered full-time students for 2018/19: 318,000 (up 7% y-o-y)
  • Total acceptances for 2019/20; 541,240 (up 1.5% y-o-y)
  • Non-EU applicants for 2020/21 were the highest they have ever been at this point – over 73,000 (up 15%)
  • 2018/19 Full-time registered students estimated demand pool for PBSA: 1.16 million (up 1.5% y-o-y)
  • Total acceptances for 2019/20 from 18-year old UK students up 1.3% y-o-y
  • 18-year old UK applicants for 2020/21 had risen by 1.7% to the highest they have ever been at this point in the cycle

 

Coming out of a strong 2019, Q1 2020 investment activity showed the purpose built student accommodation sector (PBSA) was in the best health it had ever been in, with 2020 set to be the best year on record.

  • Blackstone acquisition of iQ student accommodation – largest ever UK private real estate transaction for £4.66 bn in Q1 2020
  • UK market strengthening further with benchmark yields trending stronger for Central London, Super Prime Regional and Prime Regional Cities
  • Additional portfolio and single asset sales were under negotiation during Q1 2020 demonstrating strong appetite for assets
  • Room bookings for 2020/21 as at March 2020 were on par with this time last year
  • Strong pipeline of development activity with over 19,000 new beds set to come onto the market for 2020/21

 

HE and PBSA – COVID-19 Impact So Far

With the development of COVID-19, disruption to student recruitment and enrolment to this coming 2020/21 academic year are currently unknown. The impact is likely to affect universities differently depending on the demographic composition and financial position of each institution respectively.

Key HE Sector Developments include:

  • The Universities Minister asked all universities to stop making undergraduate unconditional offers on 23rd March 2020. This moratorium on unconditional offers was extended and is ongoing until 4th May 2020.
  • The UK Government suspended all A-Level and higher examinations for this summer. Instead students will be offered university places based on predicted grades and performance reports. These grades will be published on 13th August 2020. Universities are expected to treat these calculated grades for entry fairly and consistently in the same way as any qualifications from previous years as reported by UCAS.
  • There is the possibility of a temporary student number cap being implemented to ensure continued sustainability in terms of student numbers (i.e to ensure some universities don’t ‘over recruit’). Universities UK clarified that student number controls are being considered, but are not currently confirmed, as they explore “options for stability measures”.
  • Universities UK has set out a series of proposed measures to ensure universities are able to continue as they face significant financial challenges in the future from the loss of income sustained from COVID-19.

 

Key PBSA Sector Developments include:

  • Some owners and operators are allowing students to break tenancy contracts and will not be held liable for the final rental instalment with some rebates to those who have paid in advance. Unite Students led the market on this, with other major operators adopting similar initiatives.
  • The British Property Federation submitted a briefing on 8th April 2020 to government officials on how the student accommodation sector can be supported throughout the ongoing pandemic including a request that the government legislate to ensure all student accommodation providers cannot be charged council tax as a result of the vacant rooms arising from the pandemic.
  • The market uncertainty from COVID-19 has led to some deals being put on hold or “slowed down”, as investors continue to monitor market sentiment and look at the structuring of deals to ensure that pricing is prudent and viable.
  • In response to the market uncertainty, values are expected to be lower than pre COVID-19 expectations as a result of perceived risk to income over the next 12 to 18 months, resulting in requirements for rental guarantees or capital deductions to cover potential one-off shortfalls in rent over this period.

 

Outlook

  • Based on our CBRE Student Index, an analysis historic Total Returns for PBSA shows the sector has a history of low volatility. Coupled with historic strong capital and rental growth, this shows there continues to be an investment case for student accommodation. This is reinforced by existing investors in the market publicly supporting the long-term fundamentals of the sector in the UK.
  • In the short term, there are likely to be income shortfalls over the summer period for 2020 and for the 2020/2021 academic year whilst universities continue to make decisions on how they will deliver teaching in September 2020, and if indeed there will be delays to the start of the academic year.
  • The pandemic will widely impact ongoing development projects, as these are put on hold which will present delays to practical completion, increases in cost and supply chain issues; all of which have the potential to impact development viability.
  • However, student sentiment still shows good appetite to continue to higher education. A survey from UCAS and YouthSight published on 3rd April 2020 found that 86% of A-level students were continuing with their university application as planned for the 2020/2021 academic year.
  • While COVID-19 has undoubtedly put a delay on travel in the short term, from surveys undertaken by various organisations, international students largely still intend to follow through with their study abroad plans, however may defer until 2021/22. The number of international students who choose to enrol for the coming 2020/21 academic year will have significant impact on university finances.
  • Amidst the immediate uncertainty of how universities will proceed under the current conditions, unprecedented economic challenges as a result of COVID-19 may mean an increase in the number of domestic applicants at both undergraduate and graduate level in a bid to avoid unemployment, potentially boosting demand.
  • Unresolved questions for the sector pivot around when the 2020/21 academic term will commence, what financial shape will institutions be in and whether the sector will get a bailout. We will be exploring these questions as developments across the sector continue in our next blog.

 

We continue to closely monitor the impact of COVID-19 on the investment market, investor appetite and market liquidity.

Sources: UCAS, HESA, Universities UK, QS Survey, HEPI, ICEF Monitor, BPF, CBRE Research