Buy-to-let is doomed by purpose-built flats for Gen Z
The crumbling walls, dirt-coated appliances and crumbling ceilings of the TV series The Young Ones were all a part of the rite of passage.
The chaos and filth that was glamorised in the 1980s surreal sitcom are no longer popular with Gen Z.
The student housing is becoming more luxurious than the old shared houses, with cinema rooms, yoga studios and other amenities.
This sea change is being driven by a wave institutional investment as pension funds are replacing buy-to let landlords.
This shift is driven by the high occupancy rates of managed student halls and rent growth as institutional investors flock to purpose-built student accommodations (PBSA).
The industry has seen a boom thanks to this injection of money.
According to JLL, there were 61,000 PBSAs owned by private individuals in 2004. There are now 412,000, a 575pc increase.
Comparatively, the number university-owned beds for students has increased by only 12pc over the same time period to 353,000.
CBRE estimates that these properties collectively are worth approximately £70bn. They house around a third (or 2 million) of UK undergraduate students.
Another third of the population lives in private rentals, mostly in HMOs, or houses in multiple occupations, also known as houseshares, while the rest live with their families.
Bill Hughes, global director of real assets for Legal & General Investment Management, which manages investments totaling around £1.2 trillion, believes that this landscape will change dramatically over the next decade.
He claims that the growth of student-specific properties coincides with a long-term decline in buy-to let investment as landlords leave the market due to dwindling share.
Hughes says that the HMOs and PBSAs will both be reduced by half.
LGIM began investing in this sector in 2011, and now manages PBSA investment worth more than £1.2bn. It has plans to continue growing.
The LGIM Student Living Platform was launched at the end of April when it announced that two PBSA properties were purchased for a total of £122m.
Hughes says that this is a significant change in strategy, since LGIM wants to grow its portfolio of student properties to £1bn over the long term.
After Covid wrecked havoc on commercial leasing and forced pension funds to abandon traditional real estate investments like shopping centres, student rentals are now on the rise.
James Stevens of Aviva Investors, the head of global real estate investment, said that Aviva Investors had invested around £1bn in PBSA. This includes £300m in the past 12 months.
Axa Investment Managers, meanwhile, bought its first PBSA in London in 2022. It boasts €3.5bn (£30bn ) in student accommodation assets in eight countries.
Jonny Long of Investec’s corporate real estate department said that pension funds are now joining a growing number of investors who want to take advantage of PBSA returns.
Singapore’s sovereign fund GIC announced that in 2022 it would be acquiring Student Roost, UK’s third-largest PBSA provider.
Long says that this is only one example of how high-net worth individuals and family offices are also targeting smaller PBSAs.
Unite, Britain’s largest private PBSA, has a record pipeline for student beds, worth £1.3bn, in cities such as Nottingham, Edinburgh and Bristol.
Insiders in the industry say that the lure of a steady return and the imbalance of supply and demand are behind this interest.
Lizzie Beagley is the head of UK PBSA for Savills. It is a very stable asset class. You can replace 300 tenants the day after a tenant goes bankrupt.
In recent years, student accommodation has outperformed all other types of property investment.
CBRE estimates that student accommodation assets will generate an average return of 7pc in 2023. This compares to a loss of 11pc for all commercial properties.
According to the Higher Education Statistics Agency, the number of students in Britain has increased by approximately 400,000 over the past six years. This includes postgraduates, and is expected to reach a new record of 2.8million in 2021-22.
As a result of this, the supply of accommodation is not keeping up with demand. PBSA occupancy levels are typically around 98pc to 99pc.
JLL estimates that Britain will need to build between 70,000-320,000 PBSAs to meet current demand levels, assuming there is no further increase in student numbers.
Experts believe that the number of undergraduates who enter higher education will not decrease anytime soon. The population of 18-year olds in Britain is expected to increase by 124,000 people by 2030.
Stevens says that PBSA provides a recurring, repeatable income which can be used to hedge against inflation.
Long explains that this is possible because the providers can reset rents each year. “That’s impossible in other asset classes of real estate where you may sign a 10 year lease.”
Demand is predictable. Whitten says that students are one of the easiest subgroups to define when it comes to demographic profiling.
Hughes says, “We have a spreadsheet that shows all the higher education institutions in the UK. It also includes how many students each organisation wants to host at their facilities every year.”
The surge in demand for rental apartments that are purpose-built has coincided in a decline in the buy-to let sector.
Joe Lister is the chief executive officer of Unite. He says that “PBSA plays a vital role in meeting the demand for housing as HMO landlords are leaving at a rapid pace.”
CBRE estimates that between 2019 and 2022 the number of HMO licenses will drop by 4pc, which is equivalent to up to 80,000 beds for students.
Compared to a private room in a house-share, PBSA costs significantly more. The median weekly rent for a private room with en-suite in a PBSA cluster flat in London in 2022-23 was 53pc higher than a room rented privately.
The government’s Buy-to-Let Tax Crackdown has squeezed small investors who own HMOs. Long says that “being a dinner-party landlord” is not as attractive as it once was.
Hughes says that these changing dynamics can be seen in cities across the world: “What’s happening is that expensive and poorly managed real estate will soon disappear from the market, and it will be replaced by better-managed and higher quality properties.”
Stevens says that the standard of living acceptable 20, 30, and 40 years ago, is no longer acceptable.
The cost of studio apartments in PBSAs is comparable to the rents available in private rentals.
CBRE reports that a London studio PBSA apartment will rent for 259 pounds per week in 2022-23. This compares to a weekly average of 254 pounds for a private studio in a comparable area.
Analysts argue that PBSA is still a better option because it includes utilities, communal space, management, and pastoral care.
In order to overcome the issue of cost, PBSA providers make a concerted effort to appeal to parents instead of students.
Anthony Codling is the managing director of RBC Capital Market. He says, “Companies tell me that they sell to parents and not students.”
The sector, which has seen a massive growth in the last few years, is now struggling with high interest rates as well as an overall drop in deal making.
According to JLL, between 2016 and 2022 the annual investment in this sector has more than doubled, reaching £8.2bn. The investment in the sector fell dramatically to £3.3bn by 2023.
The planning system was a major factor in the shortage of beds in 2023, which hit a 5-year low.
Analysts are optimistic about the future of the industry, especially as the prospect for rate reductions may serve as a springboard to future investment.
Hughes says that this optimism will lead to a growing substitute effect in the industry. He predicts a “rotation”, from buy-to let landlords to pension funds.
He asks: “Will house shares exist in some form in the future?” They will still exist, but in a much smaller proportion.