UK Tops International University List As Student Accommodation Sector Continues To Soar

In our last newsletter, we looked at how the student accommodation market, “the best performing UK property investment sector”, can work for your portfolio. This time, we cover the latest statistics and projections from the just-released 2012 student property report from Knight Frank.*

To recap, the fundamentals of performance in this sector are: record applications for university places before the increase in fees (in October this year); rising international applications for UK university places; and an increasing demand for and a structural undersupply of purpose-built, high quality, student accommodation.

If you haven’t done so already, download our London Student Accommodation Investment Guide right away. Read on for the full story.

London leads the way!

The most undersupplied (and most desirable!) market is London. Total returns for investors in September 2011 were highest in London, climbing to 15.1% from 8.4% in the previous year. Rents are also pushing up by an average of 9.1%. The average rent for a studio is now £278 a week (up from £257 last year) and £210 for en-suite rooms (up from £192).

The picture for the regions is also robust, with average rents for apartments and en-suite rooms rising by 4% and with total returns at 10.5%.

The customer base for purpose-built student accommodation includes a high-and-rising proportion of overseas students, with a growing trend in student mobility. Overseas students have a high tendency to choose bespoke accommodation for a variety of reasons, including security, location and facilities.

Global student mobility: a key opportunity for investors

Additionally, UK university fees are competitive compared to the USA and Australia (other leading choices for overseas students). For example, undergraduates pay nearly £25,000 per year at New York University, £21,000 per year at Harvard (in the US), with the University of Sydney (Australia) at £16,500. However, similar courses at Oxford in the UK are charged at less than £13,500.

In fact, the number of global students (in the UK) has risen more than five-fold between 1975 (with just 600,000) and 2008 (with 3.3 million); and is expected to double again in the next 14 years (to 7.6 million).

UK hosts five of world’s top 20 institutions

The UK is well placed to take advantage of the ever-increasing mobile student population, with five of the world’s top 20 universities (according to the QS University rankings, which cover 700 international institutions**). Cambridge tops the league, beating both Harvard and Yale, at number one in the world with a five star rating from QS.

Oxford comes in at number five, closely followed by Imperial College London at six and University College London at number seven. The University of Edinburgh is number 20 in the ratings list. Also of note is The London School of Economics (LSE), with international students making up 56% of its population.

Rising tuition fees to prompt a ‘flight to quality’

But will rising tuition fees have an impact on the sector? The introduction of fees from October 2012 is expected to “create turmoil in the higher education sector”, but Knight Frank researchers believe this will prompt a ‘flight to quality’ by students, further strengthening the position of the most prestigious universities.

James Pullan, head of student property for Knight Frank, explains: “The UK is the world’s second largest host country and is showing increasing market share. We foresee that the top quartile universities will only gain from the tuition fee changes amid a ‘flight to quality’ resulting in stiffer competition among students. This will give the universities a wider pool of the top students to choose from, burnishing their reputation as a top-class university in the years to come and re-enforcing their attractiveness as places to invest in student accommodation.”

Wider pool of top students = an attractive place to invest

The tuition fee regime was introduced in line with proposals made by Lord Browne’s review of higher education funding and comes amid deep cuts to the higher education budgets announced by the Coalition Government.

From this October, UK universities will charge between £6,000 and £9,000 a year for tuition fees. This is a significant jump from the current ‘top-up’ fee structure where full-time students can be charged up to £3,375 a year. Many universities have chosen to levy the higher end of the fees, with only a handful pledging to charge less.

The new rules mean most British and EU students starting a three year undergraduate course in September 2012, will graduate in 2015 owing tuition fees of up to £27,000. Add in loans taken to fund the cost of living and some students could end up with debts of £50,000.

However, the way in which fees are structured means graduates do not have to start paying off their loans until they are earning a minimum of £21,000 per year. Payments will also be on a sliding scale according to income. Overseas students will remain largely unaffected as they already pay tuition fees.

Growth set to continue with premium branding

James Pullan comments on the fees: “We believe this new regime will have little impact on the mainstream market, as there is still an acute undersupply of student accommodation in every core market in the UK. We forecast that rental growth will continue next year, showing 5% like-for-like growth in London and the regions – closer to the longer-term trend growth after a particularly strong year. We anticipate that total returns will exceed 12%.”

So, what is the next step for success in this sector? Pullan believes it is marketing. He tells us: “Students are highly sophisticated consumers and they are particularly aware of branding in other areas of their lives. Branding for accommodation could serve to give a higher level of customer penetration. This level of successful marketing actually adds value, especially at the top end. Hotel visitors, for example, are willing to pay a premium to stay at a hotel where they know the service will be top notch.”

Axis opinion

In our opinion, it is this bespoke, high-quality within the purpose-built student accommodation sector which is attracting such attention. No longer are student ‘digs’ grotty shared houses. Developments such as those available through Axis are the absolute top end, selling out to investors whilst still off-plan and delivering net yields of 9% and 10%. Factor in a relatively low capital requirement (typically in the region of £30K to £60K in the regions and £75K to £120K in London) and you can clearly see how and why this booming market is “the best performing UK property investment sector.”

*The Knight Frank Property Index in the sector which demonstrates investment performance of this specialist asset class.

**Published annually since 2004, QS World University Rankings® is the most trusted university ranking in the world and now includes university fees information.

Next steps for success

Contact our dedicated UK portfolio manager, Zoe Bryant, today on zoe@axiscontact or +44(0)1273 447 300.
Download the Investment Guide for our currently available student property in London.
Sign up for our FREE student accommodation webinar on Thursday 9^th February.

Live with abundance,