Purpose Built Student Accommodation in Scotland is becoming the development of choice for many investors and developers to meet what appears to be never ending demand for the product. BNP Paribas report that investment into the UK’s PBSA sector increased to £1.7bn in the first six months of 2024, reflecting the positivity which the sector is currently experiencing.
And that despite those seeking to deliver new PBSA grappling with the same funding challenges facing all developers. Construction costs have been high for a long period, restricting the pace of new development. A feeling is emerging that costs if not decreasing, may at least be starting to stabilise. And with the Bank of England having cut interest rates and making encouraging noises about possible further cuts if inflation remains under control, it is to be hoped that financing costs will start to come down.
Politics will have a part to play in the future of PBSA. If the new UK Government can bring stability in economic terms which give real estate players the confidence to move forward, this will further benefit the sector. However, Scottish Government elections may not take place until 2026 and the Scottish Government is in control of residential tenancies and rents.
The draft Housing Bill currently going through the Scottish Parliament proposes rent controls for private residential tenancies but does not contain any provisions to control rents under PBSA tenancies, a factor which is adding to the sector's popularity as an investment class as compared to other elements of the private rental sector. PBSA tenancies generally cannot be ended before the end of the academic year. The Scottish Government is currently surveying both students and PBSA providers on whether students should be entitled to terminate their PBSA tenancy on 28 days' notice, bringing them in line with private residential tenancies. The surveys close on 31 October 2024.
The demands of the planners will also play a big part in shaping the future of PBSA in Scotland. Planners have generally become warmer towards PBSA, leaning into the positives which it can bring to towns and cities including regeneration of areas which have been left vacant and derelict in our city centres and bringing living back into our cities. If Build to Rent developments are less attractive or maybe even not viable in certain areas, PBSA may be the workable alternative.
As offices shrink and retail retreats from our city centres and high streets, those voids must be filled. If straight PBSA developments are unpalatable in certain locations, we could learn from countries like the Netherlands and Denmark where intergenerational living is operating successfully. Mixing much needed senior living with student accommodation could bring seniors into the city centres with all the amenities and services they need on their doorsteps with students on hand to volunteer and assist their elderly neighbours in exchange for reduced rents.
The demographics of the students choosing PBSA are changing as the UK and the rest of the world shift both politically and economically. A record high of almost 29% of all students in Scotland in 2022-2023 were international students but Universities Scotland believes global events and changes in UK immigration policy mean that the number of international students will have dipped again. With the demographics changing and PBSA providers potentially needing to attract more UK based students than has perhaps been the case in the past, more may need to be done to tailor availability to meet the new types of demand.
Affordability will be one of the keys to satisfying the changing demands. Student groups, universities and the Scottish Government have repeatedly called for more affordable accommodation for students and the planners are responding in terms of conditions attached to PBSA applications. Providing affordable accommodation and at the same time delivering a good quality, financially viable PBSA scheme, particularly given the issues around construction costs, is challenging and will only be possible in some locations.
Affordability is probably one of the main reasons that students stay at home whenever possible. Currently, between 18% and 30% of students travel to university from home and miss out on full university experience. Other models could be introduced to reduce those percentages such as student cooperatives which exist in the USA and which involve all first-year students staying on campus in their first year.
The current level of accommodation would not meet such increased demand from first year students but it may be interesting for some to learn that some well-known operators, including a number of Scottish universities, had empty beds at the beginning of the 2023-2024 academic year. The question is whether that is because of the type of accommodation that they are offering or an oversupply in certain locations? Universities operate a 10 year refurbishment plan and so now may be the time for more collaboration between the public and private sectors to refurbish and reshape existing stock of PBSA.
Conversion and refurbishment of other types of buildings falling into disuse, such as offices, may be another solution which developers and higher education institutions could turn to. This approach sits well with the green agenda, employing the circular economy and reusing existing buildings and materials wherever possible to reduce the carbon footprint of the development. At the same time it is important that the industry does not lose sight of what has made the sector so successful-a high-quality, purpose-built product, and the challenge for developers will be to retain that whilst meeting the challenges of affordability.
We are now at a crossroads with older stock coming to the end of its shelf life and an apparent rush to build new stock to take up any available slack. Not all developments seeking planning permission right now will come to fruition but that still leaves many vying for funders, investors, operators and most importantly occupiers. Having proven its resilience as an asset class, regardless of pandemics and economic shocks, PBSA cannot and will not stand still.
