COVID-19 has undoubtedly created a range of challenges within the real estate market, both accelerating trends identified before the pandemic and creating entirely new ones. Bohill Partners is hosting a series of events, bringing together senior leaders from specific sectors, to discuss the impact of the crisis and the challenges it presents and share ideas on how to deal with some of these issues.
Following our last round table session on the future of the office market, we now turn our attention to PBSA. Coronavirus has had a vast impact on Universities, with many students choosing to return home to spend lockdown with their families, whilst others have faced difficulties surrounding travel restrictions and closed borders. This has left those in the PBSA industry with a variety of challenges around tenancy, health, hygiene and wellbeing. We gathered 14 industry experts from some of the most influential investors, developers and advisors, to share their thoughts on the impact of the crisis on the student market and the future of PBSA.
How are student accommodation operating models being adapted to cope with the crisis?
The reaction to the crisis has differed depending on location and student population. Whilst in parts of Northern Europe, students have chosen to stay in their accommodation, many of which are self-contained studios, with operators closing off communal areas and gyms, in the UK and Spain, students have chosen to vacate their accommodation and move back home to their families. For our guests with international portfolios, there were also clear cultural difference between the response to the crisis in Europe and in the US as the US demonstrated more resistance to facility closures and lockdown restrictions.
The impact of the crisis and the future outlook also differs depending on the student demographic, and whether a portfolio is positioned towards domestic or foreign students. In places like Spain, where around 80% of students are domestic, the demand for student accommodation next year is likely to be stable. In universities that have a higher population of international students, the uncertainty around travel, will have an impact on occupancy rates. Whilst this significantly impacts the demand for student accommodation in these destinations, operators remain confident that in Europe, they will be able to replace non-EU students with domestic and EU students in order to reach occupancy.
In order to adapt to social distancing, operators have closed communal areas and gyms, and moving forward, will not be letting double bed rooms, but instead focusing on letting only studios and single bed rooms, with the view that flats with communal kitchen and dining areas will be considered to be a household, with government distancing rules applying. Some operators have even provided nurses to test students entering and leaving accommodation complexes and have offered quarantine spaces for those needing to self-isolate, with this expected to continue into the next academic year.
Despite the definite challenges in adapting to the crisis, PBSA, as a sector has emerged with a strong reputation, with investors and operators demonstrating their ability to control their operation and respond to crisis. The PBSA sector has generally treated clients well and those who have had to manage difficult situations, where students were unable to travel home due to closed borders and travel restrictions, have received positive feedback from parents and universities, thanking them for how well they have cared for students and parents re-enrolling their children for the next academic year.
What is the outlook for September?
Whilst nothing is certain, universities are planning to start the next academic year with as much normality as possible. Whilst large lectures will take place online, as announced by universities such as Cambridge and Manchester, smaller group tuition such as seminars and tutorials will still take place in person, and even online learning is expected to be campus based.
In Europe, operators are also starting to see recovery in terms of international bookings, and whilst it is likely that the numbers of international students will be lower than other years, the political climate in the US, leaves European, and particularly UK universities as the preferred choice for international students, particularly those from East Asia. Though nothing is certain, investors and operators hope that travel restrictions within the UK will be favourable to students coming to study in the country, with study to work visas being extended and prioritised. There have even been considerations around universities chartering flights from countries with high international student populations such as China, and flying them directly to the university, where they can then complete a quarantine period.
The potential decrease in international students is a considerable problem for universities, who benefit greatly from international students, with their fees being priced at 2.5 times that of a domestic student. Our university expert reminds us that this will force universities to lead wide scale student recruitment programmes, in order to recuperate their international student intake, and these are schemes that will directly benefit the PBSA sector.
The general consensus seems to be that, whilst a second wave could have a detrimental impact on social life, for the majority of students, the pre-crisis university experience is still highly sought after, as is the desire to return to normality. The impact of the crisis means that most students will be unlikely to defer as the opportunities to find work or travel in the current socio-economic climate are extremely limited. Going forward, operators will prioritise their duty of care to students, and enforce facility closures if they are deemed to be high risk, though the reality is that much of this will come down to government restrictions as operators will struggle to enforce regulations unless they are legally backed. There will also be a greater awareness of how crisis situations can impact students, both in terms of mental health and financial hardship, and operators will be proactive in ensuring that they are able to support students in times of crisis, with student wellbeing at the heart of their operations.
How has Covid-19 impacted deal flow in PBSA?
When it comes to financing new transactions, the PBSA sector, like many others, has seen some slow down. Whilst existing acquisition and development finance arrangements still stand and many have managed to close deals already in the pipeline before lockdown, new business is a lot slower, with banks being temporarily closed to new entrants and projects. This does not mean that the fundamentals of PBSA are not attractive, but rather results from banks being reluctant to lend due to the potential for distress on their books from other sectors, and until there is more clarity, financing for new projects will be difficult to obtain.
As the UK remains some weeks behind the rest of Europe in their easing of lockdown, several investors have considered focusing more on European opportunities and less on the UK. However, as restrictions continue to ease in the UK, the outlook is becoming more positive, and whilst a second wave could pose serious issues, the importance of UK universities and their place within the higher education system means that the outlook for the PBSA market long term, remains very positive.
Despite the slowdown in transactions, PBSA remains a defensive asset class, with investors viewing this as a short-term problem. Along with logistics, PBSA is expected to be one of the more resilient sectors throughout the crisis and our guests speculated that in light of the significant challenges currently impacting the retail, hospitality and even office markets, investors may be more likely to deploy capital into student housing at the expense of these more traditional asset classes. Recent deals, such as Blackstone’s £4.7bn acquisition of IQ Student Living from Goldman Sachs, displays a strong level of interest from investors, with other investment managers showing a willingness to join the bidding process. With this particular deal closing as the crisis hit Europe, the importance of Education as an industry, paired with the uncertainty surrounding other sectors, suggests that the student market will be an attractive area for many investors going forward.