Student Accommodation outperforms again, delivering total returns of 9.4% in year to September 2019

While capital values for all mainstream UK commercial property fell by an average of -3.0% yoy (to September 2019), Purpose Built Student Accommodation (PBSA) assets saw values rise by 4.0% for the same period, according to the latest CBRE Student Accommodation Index

This is slightly down from the 5.4% increase for the previous year (to September 2018), but nevertheless underpinned impressive total returns of 9.4%, which far outpaced the 2.4% returns seen for mainstream UK commercial property. The gap in relative performance between PBSA and the mainstream thus widened significantly, from 2.0 percentage points in the year to September 2018 to 7.0 percentage points in the year to September 2019.

Rents rose 2.7% and 2.6% on a gross and net basis for Student Accommodation for the year to September 2019.

The Index is disaggregated into ‘Central London’ and ‘Regional’ geographies, the latter being further split into Super Prime, Prime, and Secondary.

Student Accommodation in Central London saw the strongest growth in capital values at 6.7%, pushing total returns to 11.3% year-on-year to September 2019. Regional Student Accommodation annual total returns to September 2019 were 8.3%, with capital growth of 2.3%.

Outside of London, Super Prime and Prime towns reported modest capital growth of 3.3% and 2.7% respectively, though returns for Prime towns were slightly stronger (8.6%) than Super Prime (8.4%). Secondary towns saw the weakest performance – for the 12 months to September 2019, returns were 4.4%. This was due to a contraction in capital values of -2.6%, although this was less severe than the previous 12 months, which saw capital values fall by -7.6% in Secondary towns.

Net rental growth was strongest in London with net rents rising by 4.5%. Regional geographies saw an increase of 1.8%, held back by weaker growth of 1.0% in Secondary towns. Net rental growth was stronger in Prime and Super Prime Regional locations, at 1.8% and 4.2% respectively.

Large Student Accommodation properties (500+ beds) outperformed small (less than 250 beds) and medium (250-500 beds) properties for the year to September 2019. Capital values for the larger assets rose by 5.1%, against 3.3% and 3.4% for small and medium-sized properties respectively. This led to total returns of 10.5% for sites with 500+ beds, whilst the other size categories fell below the national average with returns of 8.8% (less than 250 beds) and 8.6% (250-500 beds). Out-performance of the 500+ beds cohort was driven by stronger net rental growth – 3.1% and 3.3% on a net and gross basis, slightly above the national average of 2.7% and 2.6% for the year to September 2019.

Finally, assets in towns where student application numbers were up compared to the preceding year out-performed those where applications were down – total returns were 11.3% and 7.5% respectively, with much of the differential accounted for by relative net rental growth of 4.4% versus 1.2%.

Student accommodation continues to give investors superior returns to mainstream commercial property – indeed the performance gap increased significantly this year as PBSA momentum was largely unchecked by the woes afflicting the more traditional markets. Within the sector, many of the same trends that we have seen for some time – out-performance of London, Super Prime and Prime Regional over Secondary, out-performance of larger assets over small, and out-performance of assets in towns where student applications have grown – persisted into 2019. As we head into 2020, we continue to expect PBSA to out-perform given exceptionally strong investor demand, an overall lack of supply at the macro level (if not in every micro location), and a proven track record of delivering solid returns in uncertain times.
Tim Pankhurst, Senior Director, Valuations, CBRE