Back to school
The pandemic saw universities and students plunged into an unparalleled teaching experiment, moving to almost a completely online delivery of education. In much the same way as people have questioned the future of the office, some began to question the future need for students to live near their universities.
The dust has now begun to settle, and we have some informative assessments pointing to the future of the learning experience and importantly, what students want.
The 2021 annual Student Academic and Experience Survey (Higher Education Policy Institute and Advance) reported a fall in satisfaction with timetabled contact hours to the lowest level since the survey began. Perhaps most significantly, despite high levels of satisfaction with learning technology, the survey data showed students have a clear preference for in-person learning. 57% preferred this compared to 31% for a blended approach and just 12% preferring outright online learning. This is before you consider the array of factors beyond learning that draw students to living where they study.
This paints a very reassuring picture for the outlook for demand for PBSA in the UK. As do the figures indicating demand for higher education available at the time of this publication. Acceptances for a 2021/22 start were up 5.4% on the previous cycle - this represents the biggest rate of increase in the last ten years.
of students have a preference for in-person learning
of students have a preference for online learning
of students prefer a blended approach
Source: HEPi & AdvancedHE
The increase in demand for higher education during times of economic uncertainty is something we have seen previously, with applications rising 7.8% for the 2009/10 cycle in the wake of the Global Financial Crisis. This highlights the defensive appeal of the sector to investors.
The most recent set of figures for students applying in in the early October deadline showed a more modest 1.1% increase, perhaps reflecting the more stable environment we are now in, but this represents a small cohort (c.11%) of overall applicant numbers.
While encouraging, there are two pretty big stories within the figures. Firstly, EU domiciled applicants have fallen drastically since Brexit (and the according changes to the tuition fee structure for international students). They dropped 40% in the January deadline figures for a 2021/22 start, equivalent to 17,000 students. They also fell 17% in the most recent early October deadline figures, suggesting this story has further to run next year.
Some comfort can be found from the increase in domestic and non-EU applicants which has more than offset this. Ultimately, EU students only make up about 5% of the UK’s total student cohort. We expect that in 2022 UK universities will revise their approaches to student recruitment from EU countries and eventually the numbers will recover to some extent, but this will take time to play out.
PROPORTION OF APPLICATIONS BY TARIFF AND DOMICILE AND Y/Y % CHANGE
The other big story is that the long-run trend of growth from non-EU applicants is likely to continue in 2022. Fundamentally, this is underpinned by the strength of the UK’s higher education offering and the appeal of the UK living experience.
This can be seen through the clear preference from international students for higher tariff institutions – medium and lower tariff institutions actually saw a decline in applicants in the last cycle, despite the overall increase.
There is also a new government focus to capitalise on this and grow international student recruitment. It has launched a new student immigration route, bringing a number of benefits, and a graduate route, allowing eligible students to stay in the UK to work, or look for work, for 2 years (3 years if studying at PhD level) after graduating. This is one of the most generous post-study schemes in the world and will also help attract back EU domiciled applicants.
Analysing the risk curve
Unsurprisingly, the investment community has been paying close attention to these strong fundamentals and with Covid-related uncertainty receding, we expect the strong investment volumes of 2021 to carry through into 2022. At the time of writing over £4.5bn of investment deals have either completed during 2021 or are about to – the third very strong year for investment volumes, although 2020 was skewed by the huge Blackstone acquisition of IQ.
PBSA NET INITIAL YIELD GUIDE
Generation Z are 72% more likely to spend money on goods and services that are sustainable
The preference of international students for higher tariff locations has also not escaped investors and this has been reflected in the transactions that have occurred so far in 2021.
All indicators point to a continuation of investment demand next year. Importantly, there have been a slew of significant fundraises in 2021 to target the sector, to add to the capital already chasing it. We believe this demand will lead to yield compression in London and prime regional locations and we have already begun to see some evidence of this in late 2021 deals. With many of the major portfolios and assets having traded recently and shortage coming to market we think investors will increasingly move up the risk curve and target development funding opportunities.
2021 has served as something of a wake-up call on the importance of ESG across real estate as a whole. This will become more embedded in the axis of decision making in PBSA investment, development and operation in 2022 and we have already seen Unite submit plans for its first net zero carbon scheme in Paddington.
Kinetic Capital, one of the major debt providers to the sector, have announced they will require a firm commitment to student wellbeing as part of their lending criteria. Their loan facilities with include financial incentivisation for borrowers to deliver initiatives supporting the positive mental health and wellbeing of students.
Climate change is also the issue Generation Z, the PBSA customer is most concerned about. They are 72% more likely to spend money on goods and services that are sustainable. In the same way that we expect them to exercise a preference for employers who match these values when they graduate, we expect them to be more attracted to universities who are ‘walking the talk’ and take into consideration sustainable accommodation and operators.