Student Property - Knight Frank 2014 Highlights
Knight Frank has recently released its 2014 insight report into student property. The student property market is an ever growing market and one that appeals to many landlords as it typically remains strong through economic downturns and continues to grow. No more so than here in Cardiff which has a large student population and as such a strong property market.
Lack of purpose built student accommodation
One of the main reasons the student market is so attractive to property investors is the undersupply of purpose built student accommodation (PBSA) and university halls of residence. In all the major cities mentioned in the report the number of private HMOs were significantly higher than PBSA or university halls of residence.
It was also noticeable that even with significant investment into the PBSA sector the amount of PBSA available was far less than the number of university halls of residences available. Only Manchester and Leeds had a supply of PBSA that was similar.
The lack of PBSA and university halls is also unlikely to be rectified in the near future as student numbers continue to rise. Therefore, all student property markets will be continue to be undersupplied with private HMOs still dominating the market and Knight Frank expects to see increased rental growth, sharpening yields and improved performance for existing funds during 2014.
Positive rental growth
The Knight Frank report mentioned that rental growth has increased throughout every year of the economic downturn. Up until September 2013 UK blended rental growth increased by 1.59% with regional growths up 1.55%. This figure was even higher in London, these results increased by 1.73%. It’s this continued growth, even through economic downturns, which makes the student property market so attractive to investors.
The report also mentioned that cities with high performing universities saw a stronger increase in rental growth. For example cities such as Bristol, Edinburgh and Cardiff have experienced a growth of between 3% and 4%, whereas cities such as Preston, Leeds and Birmingham have actually seen one-off rental reductions. This is surprising given the strong student property market across the UK.
“Studio” rents have also grown quicker than “en-suite” cluster flat bedrooms. The report reveals that this is because of the growing number of international students who find this style of accommodation more attractive. However, “studio” rents are in limited supply, in London the number of “studio” rents available is expected to decline while demand is set to increase, thus increasing the demand/supply imbalance.
HMO vs PBSA
The Knight Frank report revealed that many students would elect to pay more for PBSA rather than HMO properties. This is because usually PBSA stock offers higher quality accommodation, rents inclusive of bills, different tenancy lengths, a secure living environment and better quality additions such as enhanced internet connectivity and relaxation methods.
In the report it was revealed that PBSA rents were significantly higher than HMOs. In Oxford and Newcastle this amount was at least 70% higher and in cities such as Lincoln the increase was at least 20% higher than HMOs. In Cardiff’s case the cost of PBSA was 55% higher than HMOs.
Investment returns from student accommodation
Investor returns from student accommodation up until September 2013 were 7.8%. The returns from student accommodation have continued to fall over the last four years, in September 2010 the returns were around 13% and this has steadily decreased year on year. However, Knight Frank anticipates that investment will stabilise in 2014 as a result of above trend rental growth which will offset any future sharpening of yields.
It is also expected that prime yields will tighten in 2014. In 2014 UK rental growths are expected to increase by 2.75% and 3% in London.
Student accommodation investment overview
Although investment returns may have slowly decreased, the total returns from student accommodation have outperformed all other traditional asset classes, including retail, office, industrial and all other property. This trend has been the case since 2011 and indicates the strong attractiveness in the student property market.
Over 2014 it is anticipated that investor confidence will continue to grow, however, the student accommodation sector falls behind other sectors such as hotels and other countries such as the US when it comes to re-branding. It is also noted that brand segmentation is unsophisticated in the student market and student accommodation brands suffer from low level recognition by students.
In order to improve their market share and thus improve performance brands should focus on brand and market segmentation while consolidating their platforms as it is expected that this will become a major factor of the market over the next few years.
Nevertheless, the student property market continues to look strong in absolute terms and student property will continue to outperform traditional asset classes with yield compression in 2014.
Landmark trophy buildings
Finally the report mentions that there is a growing trend to build PBSA in landmark trophy buildings. These are high rising accommodation buildings that house hundreds of students while adding to the skyline of the cities they’re situated in. The strong support for student accommodation has fuelled their growths and the report mentions that today in the UK there are 12 buildings either built or in the planning stages which are 20 storeys or more. 5 in London, 4 in Leeds, 1 in Manchester and finally 2 right here in Cardiff, the Liberty Bridge near the University of South Wales’ ATRiuM campus and the Student Castle.
