The chaos surrounding A-level grading and university admissions in late August crowned a chaotic year for the UK’s higher education sector, David Thame considers.
ID Manchester
The threat that coronavirus would (then did) make campus teaching impossible, the flight of lucrative international students (paying fees of £7 billion), fears that they would not return and that finances would be so severely squeezed that at least a dozen universities might have to close, left the post-COVID higher education world gasping for breath.
The implications for education-related property looked dire. Given the enormous range of university and campus buildings, the many spin-off developments at science parks, and the hefty investment in purpose-built student accommodation, any slow-down in the university world meant headaches for developers, contractors and fit-out businesses.
A relief, then, to find the new academic year beginning amidst optimism for a sector that generates £18 billion a year for the UK economy. Even so, gently rising confidence comes with the heavily-underlined reservation that the next four months will be make or break.
The purpose-built student accommodation (PBSA) world is still new, and had a terrible spring 2020. Private operators forgave or forgot more than £500 million worth of rent as universities closed and students went back to live with their parents.
Yet, long-term, the rising university-age population means demand for PBSA has to grow, despite the pain of the 2019/20, and probably 2020/21, academic years.
BOHO Student Living, Glasgow by KKA Interiors
Developers have either decided to press on, or to pause and consider, depending on their temperament and who is providing their money.
Alan Pearce, South West Head of Planning Development & Regeneration at consultancy Lambert Smith Hampton, says: ‘My clients are pushing on where there is a known need for accommodation in prime cities and are just as active where there is a contractual arrangement or on purchased sites.
‘Some clients are also actively still investigating new sites, given there is a lead-in until delivery – so in effect potentially up to a year in planning and then two-year build time. So, the assumption is, quite rightly, that in 2023 there will be a need.’
The problem is not a lack of confidence in PBSA, but a generalised investor reluctance to do any spending until the economy becomes a little easier to read.
‘The depth of the investment market is still pretty shallow,’ warns Savills’ Partner, James Hanmer. ‘A lot of investors are waiting to see what occupancy of PBSA looks like in September. They are being very selective, which to me seems a bit nonsensical because vendors are offering rental guarantees and, even if PBSA occupancy levels go down a little in 2020-21, the trend is firmly up.
You only need to look at the high volume of applications to UK universities to see that, so things may not turn out to be quite the horror story in 2020-21 some have supposed.’
Russell Heffernan is a Partner at Cushman & Wakefield, advising the investors who stump up the cash to build new PBSA. He says the mood is positive.
‘In March there was a lot of nerves, a lot of concern about income in 2020, and a lot of investors treating PBSA as if it was suffering like hotels, which they saw as similar. Now there is more optimism, because people see that PBSA is not the same income proposition as hotels,’ he says.
‘You can see the investor optimisms in the deals done, with July showing more money invested than in February, before the pandemic lockdown.’
Thanks to rental guarantees from vendors, yields have remained staggeringly strong. Good London PBSA earns a yield of around 3.75%. The lower the yield, the hotter the property because yields are driven down by fierce competition to own an asset where the income is felt to be assured. Oxford Street shops and City of London offices are several points behind, and even warehouses (today’s seriously hot property) don’t get much lower than 4.5%.
ID Manchester. Image courtesy of The University of Manchester.
Regional PBSA is a little cheaper, with Manchester yields at a little over 5%.
‘Investors see the pandemic as a bump in the road, not a blockage in the road,’ says Russell.
This means more money coming into the sector, meaning more developer and more PBSA rooms to fit out over the two to three years.
However, the news for universities’ own development of new teaching and laboratory space is a little less upbeat.
Cushman & Wakefield Partner, Sarah Jones, says universities are largely sitting on their hands until they have a better idea of their student numbers, income from home students, and the prospects for international student retention. Sometime after January, when A-level re-sits will be completed and a second 2020-21 academic year intake may be completed, they will reassess.
The same caution will govern their partnerships with external developers and plans to exploit land holdings. On-campus commercial developments, science parks, and ambitious plans to make sense of now defunct campus sites – like the University of Manchester’s £1.5 billion ID Manchester tech-meets-city living scheme – may have to take second place to the business of student retention. ‘Management time will be highly focused on the day job of recruitment.
There are capacity issues and income-stream issues they need to focus on. It will be all hands to be pump. But that period of preoccupation may not take very long. By January 2021 they will know student intake from UK A-level re-sits, and whether international students are back, and then they might be keen to get on with developments,’ Sarah says.
The sudden (unexpected) removal of a UK government-imposed cap on student recruitment numbers in August 2020 also opened the door to more development to meet additional demand.
Sarah also predicts that a renewed focus on efficiency could produce opportunities for new development as older, outdated educational and student housing floorspace finally faces the chop.
Calico Student Living, Liverpool, designed by Naomi Cleaver
The sudden (unexpected) removal of a UK government-imposed cap on student recruitment numbers in August 2020 also opened the door to more development to meet additional demand.
Sarah also predicts that a renewed focus on efficiency could produce opportunities for new development as older, outdated educational and student housing floorspace finally faces the chop.
‘The universities’ property needs, post-COVID, will be different. There are decisions to make about design. For instance, smaller cluster flats where six or seven students can form a household, and where their key fobs mean you can trace their movements on campus for contact tracing – well, that is genius. On the other hand, older high density shared accommodation with lots of people sharing bathrooms isn’t going to work – probably isn’t open – and will need to be reduced in density,’ Sarah explains.
PBSA developers have also been thinking about post-COVID design, and their focus is on more staircases and elevators. ‘Easier for infection control,’ says Russell.
For now, the higher education sector is waiting to see how the new academic year performs: triumph or disaster?
‘Everyone’s waiting to see who turns up, and by November 2020 they will know,’ sways Savills’ James Hanmer. ‘We don’t think it will be anywhere near as bad as the more bearish estimates. But the truth is it’s going to take most of September and October before this is played out, as universities and PBSA operators watch student numbers.’
2020 has been a dreadful year for universities, but the horror story also reveals the source of the sector’s strength: a growing cohort of young people who want to go to college.
‘The A-level fiasco took a year of uncertainty and turned it into one of unprecedented disruption. But it underlines the willingness of UK students to go to university and all the conversations about this year’s turbulence end in the fact that the demography is pushing that number of students up,’ Sarah says.
Meanwhile the weak pound means international students have a huge financial incentive to resume, or begin, their studies in the UK.
The UK higher education sector faces a testing four months. It could still all go wrong. But if they survive until January then the prospects look good. That means more educational floorspace, more campus development, and a lot more PBSA.
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