The predictable surprise: Unite’s move into BTR

There has been a fair amount of hypothesising around what Unite’s move into Build to Rent means for the sector, and purpose-built student accommodation (PBSA) – some reasonable, some less so. The move was as predictable as it was surprising.

By Mary-Anne Bowring, Group Managing Director, Ringley Group

By diversifying their offering and capturing a greater share of the rental market, Unite is giving itself downside protection against the oncoming headwinds facing the student housing sector. Consistently high investment into PBSA is being counterbalanced by a weight of imminent risks which pose a threat to future portfolio performance. Tackling these will require significant capital spend or mitigation through diversification–or a combination of both. It is easy to see why PBSA has remained so high on the investor wishlist. Institutional capital is in a relentless pursuit of long-term, counter-cyclical income streams across operational assets.

This explains why Savills believes UK operational real estate could quadruple in value. UK PBSA has long displayed its resilience and maturity as an asset class. It registers extremely high occupancy levels, especially in London, home to high numbers of overseas students and some of the country’s best universities and employment prospects. Data shows that student numbers increase during economic downturns, highlighting the counter-cyclical qualities of the sector.

The risks faced by PBSA are both common and unique. Like all other sectors, PBSA needs to grapple with construction costs, energy prices and the recalibration of portfolios away from real estate, which is playing out in tighter operational margins and falling development levels. This isn’t such bad news for owners of existing assets in residential with a healthy market share–take Unite’s recent 5% rent hike as evidence.

PBSA does, however, face unique and very real demographic risks. Explained either by incompetence or an understandable preoccupation with Covid, the government is yet to map out the post-Brexit future of overseas students, whose presence is disproportionately felt in occupancy levels. This blurriness makes it difficult to map out the viability of the future pipeline and secure the buy-in from investors. It could also be the case that current levels are artificially stimulated by a rush of overseas students desperate to study in the UK before their chance disappears.

The growth of operational assets in Build to Rent and co-living, as well as the trends of major universities creating their own housing vehicles, means high-quality alternatives are arriving to the market, and their penetration will only grow stronger. Particularly in Build to Rent and co-living, new stock bears all the hallmarks of PBSA but to a much higher quality–fit out of units, communal spaces, amenities, and/or boast higher management standards. The build and design quality and fixtures and fittings are better, too.

It is likely that Unite–and other owners at a similar price point–will ask whether their average London rents of £222 in 2020/2021 will be competitive enough to stop their customers from moving over. The alternative is to pump capital into improvements for existing PBSA assets, but the daunting reality is that any building upgrades will need to play second fiddle to ESG and fire safety regulations. A lot of PBSA supply is legacy stock–Unite listed on the AIM in 1998–so many owners are faced with upgrading their buildings from an ESG and fire safety standpoint (see Unite’s £55m cladding fund), or risk assets becoming stranded. For those without the cash and looking to sell, the response from investors is often that it’s too expensive.

Taking those factors into consideration, Unite’s move is one which makes sense. Their proven expertise in operational management can be harnessed in a nascent industry, where this makes up a large part of the battleground. They understand young renters and can tap into a sector which Savills and BPF say could be worth £170bn by 2032.