UK Purpose Built Student AccommodationTesting times ahead?

1

A* perf ormer, b ut toug h er ch alleng es ah ead The Purpose Built Student Accommodation (PBSA) in the UK has evolved over recent years, transitioning fr om an al t e r nat i v e t o an i nst i t ut i onal l y ac c e p t ab l e asse t c l ass. W e b e l i e v e t hat , i n t he l ong t e r m , i t s p e r for m anc e p r osp e c t s r e m ai n p osi t i v e . How e v e r , ov e r t he ne x t decade, the PBSA sector is likely to be challenged, as a number of threats to UK Higher Education (HE) begin t o c r y st al l i se .

The t hr e at s ar e four - fol d, and w hi l st e ac h c an b e m anag e d i ndi v i dual l y , t he c um ul at i v e i m p ac t m ay hav e a significant effect on the university sector and, through this, PBSA.

C h ang ing demog raph ics

Fi r st i s t he de m and- si de t hr e at c ause d b y a t e n y e ar di p in the demographic profile of UK 18 and 19 year olds, who account for c. 70% of first year university entrants. This decline in school leavers could amount to £5.9bn of t ui t i on fe e s l e av i ng t he sy st e m ov e r t he sam e p e r i od, i f ap p l i c at i on and ac c e p t anc e l e v e l s r e m ai n at t he i r c ur r e nt r e c or d r at i os.

Demand may not be significantly buoyed via the removal of st ude nt r e c r ui t m e nt c ap s, w i t h e ar l y , al b e i t l i m i t e d, dat a sug g e st i ng t hat p ot e nt i al st ude nt s ar e c hoosi ng t o ‘ op t - up ’ t o a hi g he r - r ank e d uni v e r si t y , r at he r t han t he ‘ op t - i n’ t o hi g he r e duc at i on, w hi c h w as t he or i g i nal ai m of t he p ol i c y .

Both the university and PBSA sectors have benefited fr om an i nc r e ase i n de m and fr om i nt e r nat i onal st ude nt s ov e r r e c e nt y e ar s, w ho now r e p r e se nt ap p r ox i m at e l y 23% of all full time students. However, the demographic reduction in the UK would require an increase of up to 60% on the current level of acceptances for international st ude nt s t o c om p e nsat e for t he shor t fal l . A n al t e r nat i v e op t i on t o m ai nt ai n dom e st i c st ude nt num b e r s b y r e duc i ng r e q ui r e d e nt r y g r ade s r i sk s t ar ni shi ng t he quality mark of a UK degree, which is a major attraction for ov e r se as st ude nt s.

Future EU applicants will be highly dependent on the outcome of the Brexit negotiations and the level of p ot e nt i al l y hi g he r fe e s.

Non EU students also face increased restrictions in qualifying to study in the UK from a Government that has m ade i m m i g r at i on c ont r ol a k e y e l e m e nt of p ol i c y .

Apprenticesh ips and sch ool leav er w ork prog rammes

The se c ond t hr e at i s t he g r ow t h i n ap p r e nt i c e shi p and sc hool l e av e r w or k p r og r am m e s, and p ar t i c ul ar l y D e g r e e Apprenticeships (degrees without debt), which will likely hav e an i m p ac t on t he de m and for uni v e r si t y p l ac e s and therefore the PBSA sector. Whilst some of these st ude nt s m ay b e r e si de nt on- c am p us for p e r i ods of t i m e , m ost w i l l st udy and w or k c l ose r t o hom e .

O nline and b lended education

The t hi r d t hr e at , w hi c h i s st i l l nasc e nt b ut w hi c h i s l i k e l y t o g r ow ov e r t he c om i ng y e ar s, i s onl i ne and b l e nde d education (allied to the rise of apprenticeships). This w i l l c hang e t he p ost - g r aduat e m ar k e t t he m ost , b ut w i l l al so m ak e he adw ay i nt o t he unde r g r aduat e m ar k e t at t he m ar g i ns.

Inflation

Finally, inflation is likely to be a key factor in the UK e c onom y i n t he shor t t o m e di um - t e r m w hi c h w i l l hav e an i m p ac t on i nc r e asi ng op e r at i ng c ost s, b ut i n t he fac e of r e duc e d de m and i n som e l oc at i ons, t he ab i l i t y t o r ai se r e nt s w i l l b e l i m i t e d l e adi ng t o p r e ssur e s on ne t i nc om e .

Russell Group and other top research-led universities will b e t he l e ast i m p ac t e d fr om t he se c hang e s, and ar e m ost able to flex their numbers to react to the challenges. PBSA operators in these locations will also be likely to benefit.

The i m p ac t of t he se fac t or s ar e l i k e l y t o b e m ost dr am at i c at t he l ow e r e nd of t he uni v e r si t y l e ag ue t ab l e s and at t hose uni v e r si t i e s w hi c h ar e m ost de p e nde nt on t ui t i on fe e s.

PBSA investors in these locations will need to either r e p osi t i on t he asse t s or r e st r uc t ur e t he i r c ost b ase .

The r e ar e l i k e l y t o b e op p or t uni t i e s for w e l l - c ap i t al i se d op e r at or s w ho hav e t he ab i l i t y t o r i de out t he c hal l e ng e s to add to their portfolios and benefit from longer-term i nc r e ase d de m og r ap hi c de m ands.

UK Purpose Built Student Accommodation Testing times ahead?

2 UK Purpose Built Student Accommodation Testing times ahead?

P B S A b ac k gr o u ndOver recent years, PBSA in the UK has attracted a significant fol l ow i ng fr om dom e st i c and i nt e r nat i onal i nv e st or s, b uoy e d b y the resilience it demonstrated through the 2008/09 downturn and i t has sub se q ue nt l y t r ansi t i one d fr om an al t e r nat i v e t o an i nst i t ut i onal asse t c l ass.

In 2015, the sector experienced unprecedented investment volumes, with c. 75,000 PBSA beds transacting at a total value of c. £5.9bn, double the volume seen in 2014.1 Portfolio trades dom i nat e d t he m ar k e t , as ne w e nt r ant s soug ht t o ac q ui r e i nst ant sc al e and e x i st i ng op e r at or s c onsol i dat e d t he i r p osi t i ons. W hi l st i t i s unl i k e l y t hat t he se c t or w i l l r e c or d a si m i l ar v ol um e t hi s y e ar , the trend of large portfolio trades has continued during 2016, and t ot al t r ansac t i on v ol um e s ar e e x p e c t e d t o r e ac h c . £ 4b n.

G raph 2 : T erm- time accommodation of all f ull- time and sandw ich students 2 0 1 4 / 1 5 4

G raph 1 : Student accommodation I nv estment activ ity , 2 0 1 0 – 2 0 1 5

2 0 %

7 %

1 9 %

1 5 %

3 1 %

8 %

I nst i t ut i on m ai nt ai ne d p r op e r t y

Private-sector halls

Parental/guardian home

O w n r e si de nc e

O t he r r e nt e d ac c om m odat i on

O t he r or not k now n

Source: Higher Education Statistics Agency (HESA)

1Savills — Spotlight UK Student Housing 2016.2NUS — Homes fit for study: The state of student housing in the UK, published in 2014.3HESA — Full time postgraduate and undergraduate students 2014/15.4HESA — Term-time accommodation of full-time and sandwich students 2014/15.

How e v e r , t he se c t or m ay b e ab out t o fac e a p e r i od of c hal l e ng e caused by demographic declines in the UK, educational policy, the c ur r e nt e c onom i c e nv i r onm e nt , and t he c om b i ne d i m p ac t of t he se factors on the UK HE sector.

A str u c tu r al l y u nder su p p l ied mar k etSince its inception, the PBSA market has been characterised by structural undersupply. The National Union of Students (NUS) estimate that, across the UK, approximately 1 in 5 students are g uar ant e e d a p r i v at e se c t or or uni v e r si t y ow ne d b e d, 2 w i t h t he b al anc e e i t he r l i v i ng at hom e or hav i ng t o se c ur e p r i v at e r e nt e d r e si de nt i al uni t s. Thi s de m and has b e e n fue l l e d b y t he p r om ot i on of HE b y suc c e ssi v e r e c e nt g ov e r nm e nt s, c om b i ne d w i t h a demographic profile that resulted in successive year-on-year increases of 18 and 19 year olds being available to enter HE.

The t ot al num b e r of ful l - t i m e unde r g r aduat e and p ost g r aduat e students rebounded to pre-tuition fee increase levels of 1.69mn3 in the 2014/15 academic year, also helped by a growing number of i nt e r nat i onal st ude nt s — w ho ar e di sp r op or t i onat e l y l ar g e users of PBSA.

S our c e : S av i l l s

6.0

£bn

5.0

4.0

3.0

2.0

1.0

2010 2011 2012 2013

V ol um e Num b e r of b e ds

2014 2015 2016F

80, 00070,00060,00050, 00040, 00030, 00020,00010, 000--

Num

ber o

f PBS

A b

eds

3UK Purpose Built Student Accommodation Testing times ahead?

U nder l y ing stu dent demand The drive to increase participation in HE resulted in a record 37% of UK 18 and 19 year olds applying for a full time undergraduate place in the 2015 admissions cycle,5 t he hi g he st p r op or t i on e v e r r e c or de d. Thi s p r op or t i on has g r ow n r ap i dl y ov e r t he l ast t e n years, up from 27% in 2006, even allowing for a dip in applicants immediately following the introduction of the £9,000 p.a. fees.

The r at e at w hi c h e ac h ap p l i c at i on i s t r ansl at e d i nt o ac c e p t e d uni v e r si t y p l ac e s, w hi c h c an be broadly interpreted as the ‘difficulty’ of gaining admission to HE in a particular year, is also currently at a five year peak of 78%.6

Tab l e 1 b e l ow i l l ust r at e s t he r e sul t of t he se m ov e m e nt s, w hi c h has l e d t o t he t ot al num b e r of UK 18 and 19 year olds being accepted into HE growing from 344,365 in 2005 to 463,715 in 2015.7

Alongside this, the UK HE sector has been attracting international students at record rates, with a 47% increase in international students accepted at UK universities over the same ten year period, increasing from 46,525 to 68,550 in 2015.8

This growth in demand has fuelled the supply of new PBSA units throughout the country. How e v e r , t he se unde r l y i ng de m and fac t or s m ay b e ab out t o b e c hal l e ng e d, w i t h c hang e s in domestic demographics, and the impact of Brexit and the UK Government’s policy on ap p r e nt i c e shi p s and ot he r sc hool l e av e r p r og r am m e s.

T ab le 1 : Proportion of UK 1 8 - 1 9 y ear old population th at apply and are accepted to UK univ ersities

2 0 0 6 2 0 0 7 2 0 0 8 2 0 0 9 2 0 1 0 2 0 1 1 2 0 1 2 2 0 1 3 2 0 1 4 2 0 1 5

UK Population of 18 and 19 year olds (000’s)

1, 580 1,602 1,609 1,648 1,667 1,643 1,615 1,587 1,570 1, 584

UK applicants (000’s) 431 453 501 543 585 588 543 562 578 592

A p p l i c at i on r at e 27% 28% 31% 33% 35% 36% 34% 35% 37% 37%

Y oY ch ang e in applicants 5 % 1 1 % 8 % 8 % 0 % ( 8 % ) 3 % 3 % 2 %

UK acceptances (000’s) 344 363 404 424 423 430 406 434 447 464

A c c e p t anc e r at e 80% 80% 81% 78% 72% 73% 75% 77% 77% 78%

Y oY ch ang e in acceptances 6 % 1 1 % 5 % 0 % 2 % ( 6 % ) 7 % 3 % 4 %

Source: ONS and UCAS data

5 UK population data derived from 2014 Principal Projection population projections by the Office for National Statistics. UK university application and acceptance data derived from UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.

6UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.7UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.8UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.

4

9Historic UK population data is derived from ONS mid-year estimates. Forecast UK population data is derived from the ONS 2014 Principal Population projection.

A changing demographic profileIn 2015 the Office for National Statistics (ONS) estimated that there were 1.58mn 18 and 19 year olds living in the UK. This number is projected to fall over the next seven years, to a low of 1.44mn in 2021, a 14% peak to trough reduction, and does not rebound to current levels until 2025.

The population of 18 and 19 year olds began to marginally decline in the UK in 2012, in the same year that tuition fees for UK students were increased to c. £9,000 p.a. This led to a dramatic drop off in student numbers compared to prior years 2009 to 2011, which were also partially inflated as students brought forward their applications to avoid the fe e i nc r e ase .

Since 2012, student numbers have grown each year, despite a decline in the population of school leavers. This is due to a marked rise in the proportion of 18 and 19 years that hav e b e e n ap p l y i ng t o uni v e r si t y e ac h y e ar , as w e l l as t he r at e at w hi c h ap p l i c at i ons w e r e ac c e p t e d. How e v e r , fac e d w i t h t he c ont i nue d de c l i ne i n p op ul at i on ov e r t he ne x t t e n y e ar s, and t he i nab i l i t y for ap p l i c at i on and ac c e p t anc e r at e s t o c ont i nue t o g r ow m uc h fur t he r , UK student numbers are likely to begin to decrease.

G raph 3 : UK 1 8 – 1 9 y ear old population, h istoric and f orecast9

06/0

7

07/0

8

08/0

9

09/1

0

10/1

1

11/1

2

12/1

3

13/1

4

14/1

5

15/1

6

16/1

7

17/1

8

18/1

9

19/2

0

20/2

1

21/2

2

22/2

3

23/2

4

24/2

5

25/2

6

26/2

7

27/2

8

28/2

9

29/3

0

30/3

1

1, 800

1,700

1,600

1, 500

1, 400

1, 300

1,200

1, 100

1, 000

1,58

0

1,60

2

1,60

9

1,64

8

1,66

7

1,64

3

1,61

5

1,58

7

1,57

0

1,58

4

1,56

6

1,54

0

1,51

3

1,47

5

1,44

1

1,43

7

1,47

2

1,50

9

1,55

6

1,60

6

1,65

3

1,67

8

1,68

5

1,71

3

1,74

5For e c ast

S our c e : O NS

UK

18–1

9 ye

ar o

lds

(000

’s)

UK Purpose Built Student Accommodation Testing times ahead?

5UK Purpose Built Student Accommodation Testing times ahead?

I s this imp o r tant?18 and 19 year olds account for approximately c. 70%10 of e nt r ant s t o ful l - t i m e unde r g r aduat e p r og r am m e s. The r e for e , a sust ai ne d r e duc t i on i n t he num b e r of t hi s population will impact the HE sector in the UK and, in turn, the PBSA sector.

Given the projected dip over the next ten years, for universities to maintain current UK student numbers, an ever larger proportion of the UK population will need to apply to university; and/or, the acceptance rate of applications will need to increase even further. A l t e r nat i v e l y , and as di sc usse d i n m or e de t ai l b e l ow , t he num b e r s of ov e r se as st ude nt s w i l l hav e t o i nc r e ase dr am at i c al l y .

I nc r easing U K ap p l ic atio n l ev el s ► The rate at which the UK school leaver population applies for a place in HE is at its

all-time high of 37%, and thus there is likely to be limited scope for this to i nc r e ase fur t he r .

► If the acceptance rate of 78% remains constant, the proportion of UK school leavers ap p l y i ng t o uni v e r si t y w oul d ne e d t o r i se e ac h y e ar t hr oug hout t he dow nt ur n, t o maintain 463,715 undergraduate starts per year. This would see the rate rise from its current peak of 37% up to 41% in 2020/21 — c. 10% increase over the current application rate. Over the same period, HE in the UK will also need to compete against a g r ow i ng num b e r of al t e r nat i v e sc he m e s suc h as ap p r e nt i c e shi p s and sc hool l e av e r programmes, both actively promoted by the UK Government.

► The hi st or i c r i se s i n ap p l i c ant num b e r s hav e not had t o c om p e t e ag ai nst t he se al t e r nat i v e s, and onl y i n t he l ast four adm i ssi ons c y c l e s, ag ai nst a r e l at i v e l y b uoy ant e c onom i c b ac k dr op , hav e i nc r e ase d t ui t i on fe e s p l ay e d a p ar t i n t he de c i si on t o ap p l y t o uni v e r si t y .

I nc r easing the U K ac c ep tanc e r ate ► The acceptance rate for UK students is also at its five year peak, with 78% of UK

applicants securing an accepted place at an HE institution. However, the 2016 A Level results saw the sharpest decline in students achieving a grade C or above since the exams were launched in 1988, with the number of students gaining A*-C grades dropped by 2.1 percentage points to 66.9%.

► This has led to a slight shift towards lower grade profiles of HE students in the 2016/17 cycle, with places accepted by students with higher grades at A Level decreasing by 1% on last year.11

► He nc e , t he r e i s l i k e l y t o b e l i m i t e d c ap ac i t y for t hi s ac c e p t anc e r at e t o b e r e l ax e d further if UK universities are to maintain the same quality rating of their degrees.

The latest publication released by UCAS for the 2016/17 admissions cycle, details a total of 451,680 UK acceptances, which is up by 1% on the same point last year.12 A c c e p t anc e s at this point are typically 96–98% of the eventual total, which is released by UCAS in January 2017. This implies that the full cycle total will come out at between 460,898 and 470,500 UK acceptances.

10UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.11 UCAS — Interim assessment of UCAS acceptances by intended entry year, country of institution and qualifications held (2016 cycle, 4 weeks after

A-level results) — published 29 September 2016. Higher grades refer to those above ABB for all qualifications.12 UCAS — Interim assessment of UCAS acceptances by intended entry year, country of institution and qualifications held (2016 cycle, 4 weeks after

A-level results) — published 29 September 2016.

U K stu dent ap p l ic atio n and ac c ep tanc e r ates ar e at r ec o r d high l ev el s

6 UK Purpose Built Student Accommodation Testing times ahead?

W hat is the imp ac t?To anal y se t he p ot e nt i al i m p ac t of t he p op ul at i on de c l i ne ov e r t he ne x t de c ade , w e hav e assumed that UK application and acceptance rates remain at their current peak levels.

As the population declines, a cumulative shortage of c. 218,500 students is built up over the current level of 463,715 UK acceptances. The dip in applicants and accepted students w i l l b e fe l t ov e r a num b e r of y e ar s as t he r e duc t i on i n st ude nt num b e r s w or k s i t s w ay t hr oug h t he sy st e m ov e r a t y p i c al t hr e e y e ar unde r g r aduat e de g r e e p r og r am m e .

A l t houg h t he st ude nt shor t ag e s i n e ac h i ndi v i dual y e ar ap p e ar l ow , p e ak i ng at a g ap of 43,000 students, each student would generate tuition fees of up to £9,000 a year, for the three years of their undergraduate degree. Thus, this reflects c. £5.9bn worth of income at r i sk of l e av i ng t he sy st e m ov e r t hi s t i m e p e r i od, at a t i m e w he n m any uni v e r si t i e s out si de of the Russell Group, are already struggling to operate within their existing budgets.

G raph 4 : Proj ected sh ortag e of UK underg raduate students1 3

13UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.

The e ffe c t of t hi s p ot e nt i al r e duc t i on i n st ude nt num b e r s i s unl i k e l y t o b e e v e nl y di sp e r se d amongst UK universities. The impact on HE institutions will depend on: their reliance on t ui t i on fe e s; t he l e v e l of r e se ar c h fundi ng t he y r e c e i v e ; and how ov e r sub sc r i b e d t he y ar e . It is unlikely that Oxbridge and other Russell Group Universities will see the demographic di p r e duc e t he num b e r s of st ude nt s on t he unde r g r aduat e c our se s t hat t he y offe r . The y are already heavily oversubscribed from UK applicants, are more likely to benefit from t he r e m ov al of st ude nt c ap s and c an m ost e asi l y e x p and r e c r ui t m e nt fr om t he i r p ool of i nt e r nat i onal ap p l i c ant s.

I t i s t he uni v e r si t i e s t hat fal l l ow e r dow n on t he q ual i t y sc al e , w ho al r e ady fac e de m and r i sk s due t o c om p e t i t i on fr om ap p r e nt i c e shi p s and sc hool l e av e r p r og r am m e s, and ar e l e ss l i k e l y t o b e ab l e t ak e adv ant ag e of any p ot e nt i al m i t i g ant s, t hat w i l l l i k e l y b e ar t he b r unt of t he shor t ag e , and w i l l ne e d t o r e ac t b y r e st r uc t ur i ng t he i r c our se offe r i ng s t o m e e t t he p ot e nt i al r e duc t i on i n de m and.

Source: UCAS, EY analysis

06/0

7

07/0

8

08/0

9

09/1

0

10/1

1

11/1

2

12/1

3

13/1

4

14/1

5

15/1

6

16/1

7

17/1

8

18/1

9

19/2

0

20/2

1

21/2

2

22/2

3

23/2

4

24/2

5

25/2

6

26/2

7

27/2

8

28/2

9

29/3

0

30/3

1

650

600

550

500

450

400

350

300

86

89

119

162

158

137 12

8 131 12

8

127

125

123

119

117

116

119 12

2 126 13

0 134 13

6

136

139 141

344 36

3

404 42

4

423

430

406 43

4

447 46

4

459

451

443

432

422

421

431

442 45

5 470 48

4 491

Num

ber o

f stu

dent

s (0

00’s)

A p p l i c ant s

A c c e p t anc e s

L ev el of UG admissions to maintain Cumulative shortage (k)

Rolling 3-yr shortage (k) 5 18 39 65 95 117

118

98 63 24

219700

493

502

511

97

The p r o j ec ted dec l ine in nu mb er s r ep r esents o v er £ 5 . 9 b n o f l o st f ee inc o me to u niv er sities

UK Purpose Built Student Accommodation Testing times ahead? 7

T ab le 2 : Proj ected decline of UK students and ch ang e in req uired acceptance lev els to maintain current lev els

Source: UCAS, EY

2 0 1 5 2 0 1 6 2 0 1 7 2 0 1 8 2 0 1 9 2 0 2 0 2 0 2 1 2 0 2 2 2 0 2 3 2 0 2 4

UK Population of 18 and 19 year olds (000’s)

1, 584 1,566 1, 540 1, 513 1,475 1, 441 1,437 1,472 1,509 1,556

Current level of UK acceptances (000’s)

463.7

Projected UK acceptances (000’s)

458.6 451.0 442.9 431.8 421.9 420.6 430.9 441.8 55.5

Projected change from 2015 l e v e l s (000’s)

5.1 12.7 20.8 31.9 41.8 43.1 32.8 21.9 8.2

% increase of current UK acceptances req uired

1 . 1 % 2 . 7 % 4 . 5 % 6 . 9 % 9 . 0 % 9 . 3 % 7 . 1 % 4 . 7 % 1 . 8 %

% increase of current international acceptances req uired

7 % 1 9 % 3 0 % 4 7 % 6 1 % 6 3 % 4 8 % 3 2 % 1 2 %

The se uni v e r si t i e s ar e oft e n t he l e ast w e l l - c ap i t al e ndow e d, and t he r e for e oft e n hav e a lower level of institutionally owned student accommodation, a deficit which has been met in recent years by the development of PBSA units. PBSA owners and operators that are l oc at e d ar ound t he se i nst i t ut i ons w i l l ne e d t o asse ss w he t he r t he sam e l e v e l of de m and for t he i r b e ds w i l l b e p r e se nt i n t he fut ur e .

The extent of the change in demand levels caused by the shift in demographic profile, and each university’s ability to manage through it, will be influenced by a number of other fac t or s t hat ar e di sc usse d on t he ne x t p ag e .

The ef f ec t o f this p o tential r edu c tio n in stu dent nu mb er s is u nl ik el y to b e ev enl y disp er sed amo ngst U K u niv er sities

8 UK Purpose Built Student Accommodation Testing times ahead?

R emo v al o f stu dent c ap sIn December 2013, the UK Government announced that the limit on the number of full-time undergraduates would be relaxed, and then abolished by 2015. The Government projected that this would generate additional student spaces of 30,000 in 2014, and 60,000 when the cap was fully removed in 2015.14 How e v e r , t he se p r oj e c t i ons t ur ne d out to be optimistic, with actual increases of 16,770 and 19,900 acceptances in the r e sp e c t i v e y e ar s.15 I t ap p e ar s t hat t he m ai n e ffe c t of t he r e m ov al of st ude nt c ap s has b e e n t o e nc our ag e an ‘ op t - up ’ of st ude nt s as hi g he r r ank e d uni v e r si t i e s st r e t c h t o t ak e on m or e st ude nt s w ho w oul d hav e p r e v i ousl y at t e nde d a l ow e r - r ank e d uni v e r si t y r at he r t han t he ‘ op t - i n’ of st ude nt s p r e v i ousl y unab l e t o se c ur e a p l ac e at uni v e r si t y .

Thi s shi ft i s not e v i de nc e d ac r oss al l r ank i ng s and som e uni v e r si t i e s ar e hi g hl y unl i k e l y t o e x p and dr am at i c al l y . O x for d and C am b r i dg e , al r e ady r e l at i v e l y w e al t hy , hav e l i t t l e i nc e nt i v e t o di l ut e t he i r e l i t e st at us and t ut or i al t e ac hi ng sy st e m b y r ap i dl y i nc r e asi ng t he i r undergraduate student numbers. Some others at the top-end of the Russell Group may t ak e t he sam e v i e w .

A s st ude nt s ‘ op t up ’ , uni v e r si t i e s w ho hav e t he ab i l i t y t o e x p and st ude nt p l ac e s t o m e e t any excess demand will be in a position to benefit from increase tuition fee income. How e v e r , t hi s i ne v i t ab l y m e ans t hat som e i nst i t ut i ons w i l l b e l e ft b e hi nd. Thi s has i m p l i c at i ons for t he uni v e r si t i e s t he m se l v e s, and for t hose w ho i nv e st i n and ar ound t he m .

I nter natio nal stu dents During the 2014/15 academic year, there were 391,930 full time international students (approximately 28% EU/72% non-EU) enrolled in the UK, reflecting c. 23.1% of the full-time st ude nt p op ul at i on.16 This number has grown by a total of 7.4% over the past five years, and has contributed to the rise in demand for PBSA, as international students are often p r e p ar e d t o p ay hi g he r r e nt s for al l - i nc l usi v e , sup e r i or and g uar ant e e d ac c om m odat i on. As an example, Empiric Student Property Plc’s 2016 Annual Report includes the statement ‘approximately 70% of the students residing in our properties are from outside the UK.’

14UK Government Autumn Statement 2013 — 1.202, Removal of student caps.15UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.16HESA — Full time postgraduate and undergraduate students 2014/15.

I t ap p ear s that the main ef f ec t o f the r emo v al o f stu dent c ap s has b een to enc o u r age an ‘ o p t- u p ’ o f stu dents to higher r ank ed u niv er sities r ather than the ‘ o p t- in’ o f stu dents p r ev io u sl y u nab l e to sec u r e a p l ac e at u niv er sity

Source: UCAS, HESA

EU students Non EU students EU acceptances Non EU acceptances

G raph 5 : I nternational f ull- time student numb ers and acceptances

400 60108107106111106

10092

8781 393735353834312928 262523

272624212118

284281268266259239214192181

39

29

50

40

30

20

10

-

06/0

7

07/0

8

08/0

9

09/1

0

10/1

1

11/1

2

12/1

3

13/1

4

14/1

5

15/1

6

350300

Inte

rnat

iona

l stu

dent

s (0

00’s)

Inte

rnat

iona

l app

lican

ts

(000

’s)

250200150100

50

-

9UK Purpose Built Student Accommodation Testing times ahead?

17UCAS — End of Cycle 2015 Data Resources, published on 18 December 2015.18 UCAS — Interim assessment of UCAS acceptances by intended entry year, country of institution and qualifications held (2016 cycle, four

weeks after A-level results) — published 29 September 2016.19Department for Education — Funding support for EU students, press release published on 11 October 2016. 20 UCAS — Deadline Applicant 2017 Statistics: deadline Saturday 15 October 2016. UCAS Analysis and Research, published on Thursday

27 October 2016.

Universities could look to exploit this trend, to fill the gap created by the potential decrease in UK-based students. Universities extended a total of 68,550 offers to international students during the 2015 cycle. As shown in Table 2, to plug the gap created by a decline in UK students over the next two years, universities would need to increase the number of overseas students by just 1–2% over current numbers. However, this increases dramatically as the gap widens, and the projected shortage of UK students in 2021/22 would require an international acceptances to increase to 111,647, 63% above t he c ur r e nt l e v e l .

Acceptances from EU students totalled 29,300 in 2015,17 11% up on the previous year. I n fac t , i t i s t hi s p ool of st ude nt s t hat has e x hi b i t e d t he fast e st g r ow t h ov e r t he p ast t e n years, increasing by 60.3% since 2006. This trend continued in 2016,18 w i t h a sur g e i n applicants from the EU potentially looking to secure a place prior to the UK leaving the EU and t he fundi ng p osi t i on al t e r i ng .

Despite a recent announcement from the UK Government confirming that EU students will face no change in fees or eligibility for loans for courses started in 2017/18,19 EU applicants for the 2017 cycle are down by 9% compared to the same point last year.20 Thi s p ut s a hal t t o a t r e nd of annual i nc r e ase s i n ap p l i c ant s ov e r r e c e nt y e ar s, and suggests that EU students are considering factors other than just fee increases when deciding whether to study in a post-Brexit Britain.

As such, and until the uncertainty created by Brexit is classified, it is unlikely that increased EU student recruitment will be the answer to the gap created by the dwindling UK school leaver population.

If universities look to increase their recruitment of non EU students to plug the gap, this will be in contrast to recent statements from the UK Government, which has made the regime for controlling international (non EU) students increasingly restrictive over the past five years. There have been c. 100 changes to immigration rules since March 2011 and t he m ost r e c e nt c hang e s hav e b e e n am ong st t hose t hat w i l l b e t he m ost r e st r i c t i v e : i nc l udi ng t he r e m ov al of t he r i g ht s for unde r g r aduat e st ude nt s t o b r i ng de p e nde nt s; t he r e m ov al of p ar t - t i m e w or k i ng r i g ht s for st ude nt s st udy i ng i n p r i v at e Hi g he r E duc at i on and t hose st udy i ng at p ub l i c l y funde d fur t he r e duc at i on c ol l e g e s; and t he r e q ui r e m e nt for international students to show that they are able to provide £1,250/month for up to a maximum of nine months if the area of study is in London or £1,020 elsewhere, both amounts have risen from less than £600 previously.

I t i s al so l i k e l y t hat t hose HE i nst i t ut i ons t hat ar e m ost i m p ac t e d b y t he de m og r ap hi c c hang e s and r e m ov al of st ude nt c ap s ar e t he l e ast l i k e l y t o b e ab l e t o at t r ac t l ar g e i nc r e ase s i n i nt e r nat i onal st ude nt num b e r s.

The p r o j ec ted sho r tage o f U K stu dents in 2 0 2 1 / 2 2 w o u l d r eq u ir e inter natio nal ac c ep tanc es to inc r ease to 1 1 1 , 6 4 7 , 6 3 % ab o v e the c u r r ent l ev el

1 0 UK Purpose Built Student Accommodation Testing times ahead?

The G o v er nment’ s A p p r entic eship P o l ic y The Conservative Government has promoted apprenticeships as an alternative to HE qualifications, and in 2015 announced a target of three million additional apprenticeships in England alone over the five years to 2020.21 During the 2014/15 academic year, 499,900 people in England started an apprenticeship, an increase of 14% on the previous year. Provisional figures for the first three quarters of the 2015/16 academic year show 384, 500 ap p r e nt i c e shi p st ar t s, w hi c h sug g e st t hat t he t ot al num b e r w i l l b e i n l i ne or ab ov e p r i or y e ar s.22 The Government’s push to promote Higher Level Apprenticeships as an al t e r nat i v e t o at t e ndi ng uni v e r si t y c oul d i m p l y a r i sk for uni v e r si t i e s c at e r i ng t o l ow e r g r ade st ude nt s on v oc at i onal c our se s, as t he r e t ur n on i nv e st m e nt fr om t he c ost of unde r t ak i ng a de g r e e i s p ul l e d i n t o shar p foc us ag ai nst t he al t e r nat i v e r out e s t o a si m i l ar level of qualification without taking on such large debts.

The e m e r g e nc e of D e g r e e A p p r e nt i c e shi p s, w hi c h hav e b e e n av ai l ab l e si nc e S e p t e m b e r 2015 and are currently offered by 27 UK HE institutions,23 m ay al l e v i at e som e of t he c om p e t i t i v e p r e ssur e fr om w i de r ap p r e nt i c e shi p sc he m e s. The y i nc l ude t he ac hi e v e m e nt of a b ac he l or ’ s or m ast e r ’ s de g r e e as a c or e c om p one nt of t he ap p r e nt i c e shi p , and offe r ‘ no fe e s’ Hi g he r E duc at i on t o st ude nt s se e k i ng v oc at i onal l y - foc use d w or k - b ase d l e ar ni ng . Tuition is jointly funded by the Government and the employer, and apprentices receive the apprentice’s minimum wage. The offer of an immediate salary, a vocational qualification and a de b t - fr e e c our se m ay p r ov e t e m p t i ng for st ude nt s i nc r e asi ng l y c onc e r ne d ab out v al ue for m one y of uni v e r si t y c our se s am i dst fe e s and an i nc r e asi ng c ost of l i v i ng .24 A l t houg h D e g r e e A p p r e nt i c e shi p s offe r a r out e for som e uni v e r si t i e s t o m ai nt ai n a l e v e l of fee income, these students are less likely to be users of PBSA beds as they will in effect be part time students with a significant element of their apprenticeship training being p r ov i de d b y t he i r e m p l oy e r .

21UK Government English Apprenticeships: 2020 Vision.22Skills Funding Agency — Statistical First Release — Summary and Key Headlines — 2015/16, First Three Quarters — published on 23 June 2016.23Which — Higher and degree apprenticeships guide, 15 March 2016.24NUS — The Cost of Living Crisis, 12 March 2015.

E v idenc e f r o m the 2 0 0 8 / 0 9 r ec essio n su ggests that stu dent nu mb er s in f ac t r ise du r ing a su b du ed ec o no mic env ir o nment. H o w ev er , the c u r r ent c l imate is mar k edl y dif f er ent

G raph 6 : UK Apprenticesh ip Starts, b y Ag e, 2 0 1 0 / 1 1 – 2 0 1 9 / 2 0 F

Source: Skills Funding Agency (SFA)

457521 510

440500 531 563 598 635 674

0100200300400500600700800

10/1

1

11/1

2

12/1

3

13/1

4

14/1

5

15/1

6

16/1

7

17/1

8

18/1

9

No. of 25+

No. of 19–24

No. of 16–18

19/2

0

Thou

sand

s

H F

1 1UK Purpose Built Student Accommodation Testing times ahead?

25EY ITEM Club Autumn Forecast.

O nl ine edu c atio nO nl i ne and b l e nde d e duc at i on i s l i k e l y t o p r ov i de anot he r he adw i nd for t he se c t or . The r e ar e t hr e e se g m e nt s t hat m ay b e affe c t e d: on- c am p us unde r g r aduat e s t hat c hoose degree-level apprenticeships (see above), post-graduate taught (PGT) and potentially i nt e r nat i onal st ude nt s w ho c hoose a b l e nde d t r ans- nat i onal e duc at i on offe r r at he r t han a full on-campus experience. PGT students are increasingly likely to learn and work at t he sam e t i m e , for w hi c h onl i ne and b l e nde d e duc at i on i s i de al . E x ac t l y how t hi s w i l l p l ay out i s unp r e di c t ab l e g i v e n t he p r op ose d c hang e s i n p ost - g r aduat e l oan av ai l ab i l i t y . I n addition, recent research by Parthenon-EY and Hotcourses has identified a segment of students that are seeking an online or blended experience that may be as much as 15% of i nt e r nat i onal de m and.

W eak ened ec o no myThe UK economy has shown greater resilience than many had anticipated since the EU referendum vote, but a slowdown in consumer spending on the back of higher inflation and fal l i ng b usi ne ss i nv e st m e nt w i l l r e sul t i n m uc h sl ow e r g r ow t h r at e s ov e r t he ne x t couple of years, according to the EY ITEM Club Autumn Forecast.25

During the 2008/09 recession student numbers rose during the subdued economic e nv i r onm e nt , as c ol l oq ui al e v i de nc e sug g e st s t hat p e op l e l ook t o use ac ade m i a t o e sc ap e the recession and be better qualified by the time the job market picks up again. However, t he c ur r e nt c l i m at e i s m ar k e dl y di ffe r e nt fr om p r e v i ous r e c e ssi ons, due t o b ot h t he v ast l y inflated cost of undertaking a degree compared to previous cycles — and increasing worry ab out t he l e v e l of st ude nt de b t — as w e l l as t he i nc r e ase d av ai l ab i l i t y of ap p r e nt i c e shi p s and sc hool l e av e r p r og r am m e s.

G raph 7 : UK C ontrib utions to G D P g row th

Source: EY ITEM Club

2004 2006 2008 2010 2012 2014 2016 2018 2020

4 For e c ast

3

2

1

0

- 1

-2

- 3

- 4

- 5

GDP growthD om e st i c de m and Ne t e x p or t s

1 2 UK Purpose Built Student Accommodation Testing times ahead?

26GVA Student Housing Review 2015.

Thus it is unlikely that a significantly increased proportion of the UK’s 18 and 19 year old p op ul at i on w i l l c hoose t o e m b ar k on an unde r g r aduat e de g r e e . I n l i g ht of t he e c onom i c c l i m at e , w i t h t he op t i on of se c ur i ng e m p l oy m e nt and t r ai ni ng w e i g he d ag ai nst t he r i sk of l e av i ng uni v e r si t y w i t h st ude nt de b t s and an unc e r t ai n j ob m ar k e t , t he c hoi c e t o at t e nd will be finely balance for many. There may, in the face of a more severe downturn and e m p l oy m e nt c ut s, b e an i nc r e ase i n m at ur e st ude nt s ap p l y i ng t o uni v e r si t y l ook i ng t o r e t r ai n or up sk i l l . Hi st or i c al l y , t hi s se c t or of t he st ude nt p op ul at i on has b e e n a r e l at i v e l y small user of PBSA beds.

I mp l ic atio ns f o r P B S A p r o v ider sAs outlined above, the number of PBSA beds in the UK as a whole remains significantly below the number of full-time students in the UK. However, the demand for PBSA does not st r e t c h t o t he e nt i r e p op ul at i on of ful l t i m e st ude nt s. I n non- c ol l e g i at e and non-campus based universities, students often prefer to move into HMOs during their second and third years of study, and thus PBSA typically caters for first year undergraduate and p ost g r aduat e st ude nt s, w i t h a l ar g e num b e r of t he se b e i ng i nt e r nat i onal st ude nt s as witnessed by the Empiric Student Property plc.

Similarly, the increased price point of PBSA makes it unattractive to students from lower i nc om e g r oup s — a p r op or t i on of t he st ude nt b ody w hi c h has b e e n g r ow i ng ov e r t he p ast t e n y e ar s — w he n c om p ar e d w i t h l i v i ng at hom e w i t h p ar e nt s, or ot he r p r i v at e se c t or rented properties. In September 2014/15, the average weekly rent for an inclusive PBSA bed space outside of London was c. £141, vs. the average cost of a bedroom in a house share of £75 per week.26

The nu mb er o f P B S A b eds in the U K as a w ho l e r emains significantly below the nu mb er o f f u l l time stu dents in the U K . H o w ev er , the demand f o r P B S A do es no t str etc h to the entir e p o p u l atio n o f f u l l - time stu dents

1 3UK Purpose Built Student Accommodation Testing times ahead?

T ab le 3 : Percentag e of f ull time students ab le to access PBSA ( assuming f ull deliv ery of dev elopment pipeline) 2 8

Univ ersity city 2 0 1 5 2 0 1 6 Univ ersity city 2 0 1 5 2 0 1 6

London 29% 30% Leeds 38% 40%

Bristol 34% 34% Sheffield 37% 40%

Birmingham 33% 35% E di nb ur g h 36% 41%

Manchester 36% 36% Not t i ng ham 40% 41%

S out ham p t on 32% 36% D ur ham 40% 42%

C ar di ff 34% 37% Leicester 44% 47%

A b e r de e n 34% 38% Liverpool 49% 51%

Ne w c ast l e up on Ty ne 35% 38% C ov e nt r y 51% 53%

E x e t e r 38% 40%

Source: Knight Frank

The above table, produced by Knight Frank, lists the availability of PBSA to student populations in key university towns, and implies that, on delivery of all 2016 PBSA sc he m e s, ni ne of t he se c i t i e s w i l l hav e r e ac he d sat ur at i on p oi nt , w i t h anot he r t hr e e r ap i dl y ap p r oac hi ng t hat sam e p oi nt .

The assumed saturation point of 40% provided by the Liverpool research is a broad assumption, and will not take into account specific local market conditions such as the m i x and q ual i t y of t he e x i st i ng p ur p ose b ui l t st oc k , t he c ost and av ai l ab i l i t y of al t e r nat i v e housi ng , t he r e c y c l i ng of e x i st i ng ag e d st oc k , l oc al p l anni ng r e st r i c t i ons and t he l e v e l of st ude nt s dr aw n i n b y l oc al uni v e r si t i e s. How e v e r , i t se r v e s t o i l l ust r at e t w o b r oad i ssue s.

27UK Government Summer Budget 2015.28Knight Frank — 2016 Student Market Review.

P o tential c hanges in the v o l u me o f p r iv ate r ented sto c k Some commentators have suggested that measures introduced in the Summer 2015 Budget, and the predicted increase in regulation of lending to the private landlords, may l e ad t o p r i v at e r e nt e d se c t or b e c om i ng l e ss at t r ac t i v e for i nv e st or s. A s suc h, t he num b e r of available assets to rent reducing which would be a positive move for PBSA.

The first measure introduced in the 2015 Budget is the reduction in tax relief available for interest payments on buy-to-let mortgages. This will be phased in from 2017, and will decrease the tax relief on interest payments down to the basic rate by 2020.27

The second is an additional 3% surcharge is now payable above normal stamp duty on the purchase of additional homes purchased after 1 April 2016.

The se m e asur e s, al ong w i t h ant i c i p at e d m or t g ag e r e g ul at i on for b uy - t o- l e t i nv e st or s, ar e l i k e l y t o dam p e n i nv e st or ap p e t i t e t o b r i ng ne w b uy - t o- l e t p r op e r t i e s on t o t he m ar k e t , how e v e r t he y ar e unl i k e l y t o l e ad t o a hug e sur g e of t he e x i st i ng b uy - t o- l e t st oc k b e i ng sol d, p ar t i c ul ar l y i n uni v e r si t y t ow ns w he r e t he r e i s a hi g h and c onsi st e nt de m and for ac c om m odat i on. How e v e r , g i v e n t he m e asur e s i m p ac t al l l andl or ds i t m ay l e ad t o a reduction of the current price differential to PBSA as landlords try to raise rents to meet t he addi t i onal c ost s of ow ni ng t he i r asse t s.

1 4 UK Purpose Built Student Accommodation Testing times ahead?

The i m p ac t of any suc h r i se on st ude nt ’ s c hoi c e of ac c om m odat i on r e m ai ns t o b e se e n. How e v e r , a r e c e nt r e v i e w of t he sc al e of p ur p ose - b ui l t st ude nt housi ng de v e l op m e nt b y Liverpool City Council suggested that there is a natural saturation point in terms of bed share, of approximately 40% of the student body. Based on this threshold, it could be ar g ue d t hat som e l oc al m ar k e t s hav e r e ac he d sat ur at i on p oi nt .

The first is that the nature of the market for student housing operators is likely to change ov e r t he ne x t de c ade . I n t hose ar e as w he r e t he sat ur at i on p oi nt has b e e n r e ac he d or i s c l ose t o b e i ng r e ac he d, and i n m ar k e t s c l ose t o uni v e r si t i e s t hat w i l l b e ar t he b r unt of the decline in student numbers, operators are going to have to fight harder than ever to c om p e t e for b ook i ng s, e i t he r b y m ak i ng t he i r uni t s t he b e st on offe r i n t he l oc al m ar k e t or r e p osi t i oni ng t he b ui l di ng s t o di ffe r e nt p r i c i ng p oi nt s and so at t r ac t m or e b ook i ng s fr om students that have previously looked outside the PBSA sector for accommodation.

The se c ond i s t hat i n t he fac e of hi g he r c om p e t i t i on for b ook i ng s, and an e c onom i c environment where inflation is forecast to return, operating margins are likely to come unde r p r e ssur e as t he ab i l i t y t o i nc r e ase r e nt s w i l l sub due and op e r at i ng c ost s r i se . Thi s i s l i k e l y t o dr i v e i nnov at i on i n b ui l di ng de si g n and op e r at i ng m ode l s for op e r at or s t o b e suc c e ssful .

Institutions, developers and funders of PBSA are increasingly going to have to review the l ong e r - t e r m v i ab i l i t y of t he uni v e r si t i e s t hat p r ov i de t he st ude nt de m and for t he sc he m e s t he y ar e i nv e st i ng , de v e l op i ng and l e ndi ng t o i n m uc h g r e at e r de t ai l t han has p r e v i ousl y b e e n t he c ase .

G r o w th has b een str o ngest at the u p p er and mid- tar if f U niv er sities . . . c o mp ar ed to a sl ight r edu c tio n at the l o w er tar if f U niv er sitiesThe Unite Group plc, Trading Update, 8 November 2016

C o nc l u sio nGiven the factors discussed above, it appears reasonable to forecast that the total number of students in the UK university system is likely to decline over the forthcoming de c ade . Thi s de c l i ne i s m ost l i k e l y t o b e fe l t b y t hose uni v e r si t i e s at t he b ot t om e nd of t he ap p l i c at i on l e ag ue t ab l e s due t o a c om b i nat i on of st ude nt s op t i ng up t hr oug h t he r ank i ng s and challenges from alternative routes to equivalent qualifications. These universities are oft e n he av i l y r e l i ant on t ui t i on fe e i nc om e t o m e e t t he i r op e r at i ng c ost s and as suc h c oul d face significant threats to their current course offering, size and most dramatically, even viability, over the next decade without making significant changes to their current cost b ase and op e r at i ng st r uc t ur e .

A s suc h, i nv e st or s and op e r at or s ne e d t o p l an now for t he ab i l i t y t o adj ust t o a shi ft i n t he demand profile of PBSA tenants. In particular, PBSA that sources its demand from lower-r ank e d uni v e r si t i e s t hat ar e at r i sk of hav i ng t he i r ap p l i c ant p ool i m p ac t e d b y de c r e asi ng UK student numbers, increased competition from apprenticeships and the inability to shor e up t he i r m ar k e t w i t h i nt e r nat i onal st ude nt s.

This is likely to lead to a much greater distinction in pricing and investor demand for PBSA units. Best in class assets, located in cities with high underlying student demand will be i nc r e asi ng l y soug ht aft e r . The m or e p e r i p he r al asse t s, and t hose de p e nde nt on l ow e r de m and uni v e r si t i e s for t he i r st ude nt oc c up i e r s, w i l l b e t he m ost c hal l e ng e d.

The ab il ity o f o p er ato r s in the w eak er mar k ets to dif f er entiate themsel v es w il l b e the k ey to su r v iv al

1 5UK Purpose Built Student Accommodation Testing Times A head?

1 61 6

17

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