Investors Need To Do Their Homework As Inflation Hits £14B Student Housing Spend

Inflation in the construction sector is affecting the viability of student housing schemes, meaning investors need to take a close look at their developer partners.

The call comes as around £14B worth of investment targets the UK student sector.

So said Savills, publishing research that showed Birmingham as the top location for developing purpose-built student accommodation, thanks to rapidly rising student numbers.

Birmingham’s student total grew 5.4% in 2021, the highest in the top tier of locations, bringing the figure to 72,505.

“Latest application figures indicate that demand for UK higher education remains strong, despite a more uncertain economic outlook," Savills Operational Capital Markets Head of PBSA James Hanmer said. "Domestic and non-EU international acceptances both grew by 1.4% and 2.4% respectively. The number of EU acceptances has halved, however this was anticipated in the wake of the UK’s exit from the EU.” 

Investor demand for PBSA remains very high, with the final quarter of 2021 the strongest. The key deal was APG and Blackstone’s £969M acquisition of listed company GCP Student Living.  

The PBSA sector scored £4.1B of investment deals in 2021. 

However, investors need to be watchful in the increasingly inflationary mood of 2022.

“There are challenges to navigate," Savills Research analyst Nicholas Green said.  

"Firstly, acquiring land is becoming increasingly competitive due to growth in sectors such as logistics and build-to-rent. Secondly, build cost inflation continues to impact viability, in combination with rising energy prices and labour shortages.”

To mitigate these development risks, investors will need to partner with developers with consistent track records and a strong handle on their supply chains, Green said. The natural outcome of these factors is either a reducing land price or tighter yields. At the current time, sharper yields are the market trajectory.