With the new academic year beginning, Morton Fraser Lawyers’ real estate partner Jonathan Seddon explores the pressure on student accommodation provision and identifies the opportunities for developers outside of Scotland’s central belt.
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It is well documented that there is an acute housing shortage across the UK. In the student accommodation sector of the housing market, the shortage is now at crisis point.
At the start of term time last year students at Scottish universities were being advised to defer their place because there were not enough beds. Some students ended up living as far away as Perth and Dundee to commute to Glasgow University, and there were other similar examples last year in cities such as Manchester and Bristol where demand completely outstripped supply.
The same scenario looks likely to play out again at the start of this academic year, although it is likely to be worse. Student numbers are up year on year and the pipeline of ‘new beds’ is not keeping pace, so the supply and demand gap is getting wider not narrower.
What does that mean for the local higher education establishments in Aberdeen and Dundee? To answer that we need to look at the UK as a whole because there are some trends that are UK-wide. The Scottish market is hugely affected by UK-wide drivers but is slightly different in some respects, and the local Aberdeen and Dundee markets are different again from the likes of Edinburgh and Glasgow.
UK-wide trends affecting student housing
In the UK, student numbers are increasing. According to Savills’ latest UK Purpose-Built Student Accommodation Spotlight report in May this year we have UCAS acceptances (first year undergrads) on a steady upward trajectory, an increase in non-EU students far outweighing the post-Brexit drop-off in EU students, a reduction in private landlords offering five beds or more and a lacklustre purpose built student accommodation (“PBSA”) pipeline.
Although we seem to have narrowly missed a recession, the UK economy has been slow over the last two years and that has undoubtedly played a part in prompting more people to enrol in higher education, particularly post pandemic when some people managed to add to their savings during lockdown.
The UK has a fantastic reputation for higher education, and foreign students in particular attribute a great deal of prestige to degrees from UK institutions.
Insufficient student housing in Scotland
Scotland boasts four of the six oldest universities in the UK (only Oxford and Cambridge are older than St. Andrews, Glasgow, Aberdeen and Edinburgh) and all of that history and tradition adds to the appeal of securing a place to study in Scotland.
So in simple terms Scotland is a hugely popular destination for higher education and student numbers in academic year 2023 / 2024 look likely to be the highest ever. And all of those students need somewhere to live.
Supply of beds, on the other hand, is low and the gap is widening. Unite Students are currently the biggest student accommodation operator in the UK with more than twice as many beds as the second largest operator. According to Unite’s website, Glasgow is already sold out for academic year 2023 / 2024, as is Aberdeen. Hello Student does have availability in Aberdeen, as do some of the other providers, but they’re selling out quickly.
Why is the student housing pipeline not keeping pace?
So what is behind this lacklustre pipeline?
Firstly, the number of private landlords is reducing. Legislation changes designed to crack down on ‘rogue landlords’ have impacted all private landlords causing many to sell up and exit the market. Rising interest rates in recent years have exacerbated that trend because many private landlords with mortgages on variable rates have seen the gap between their rental income and their mortgage payments significantly reduced.
This reduction in private landlords has meant that more supply needs to come from commercial developers and operators, but the commercial market is also under extreme pressure.
For a start, land in Scotland continues to trade at a premium, especially in city centres which is where most student housing needs to be located. In some areas there are also issues around planning, not just delays to getting planning through but also concerns around having planning refused where local authorities feel that the concentration of students is too dense in certain city centre locations.
Interest rates are also now an issue. Many commercial developers use bank funding to build out their developments, and of course the cost of borrowing has gone up significantly in the last twelve months.
Cost of construction materials caused by global events and the post Brexit issues around availability of labour and supply chain delays have further contributed to delays in the development pipeline over the last couple of years.
Opportunities for developers and investors
On a more positive note, there is a feeling over recent months that the difficulties around cost of materials and supply chain delays are starting to ease. Added to that, it looks like interest rates might start to come down again with the recent news that inflation might be easing.
So whilst the property development landscape is still far from ideal there are signs that it is improving and developers are more actively involved in live schemes for both brand new PBSA projects, refurbished existing stock and also repurposed properties where a change of use is available.
One of the questions for developers then is location. Which university towns and cities in Scotland offer the best opportunities for return on investment? If we assume that a student accommodation development project costs the same no matter where you are in Scotland (which is broadly speaking true apart from the price of the land) then developers should be looking at locations where the market isn’t already saturated. In other words where there is room for either rental growth or improved occupancy rates, or both, so there is an opportunity for enhanced rents and therefore increased investment values.
The supply and demand gap in Edinburgh, Glasgow and St. Andrews is currently so acute that occupancy rates for the 2022 / 2023 academic year were practically 100% across the board. As a result rents continue to be at a premium and therefore any rental growth is likely to be incremental.
Student housing in Aberdeen and Dundee offer best chances for ROI
Cushman and Wakefield produced an interesting study last year (Q3 2022) where they projected the demand increase between 2022 and 2025 across all major student cities in the UK and then subtracted from that the new PBSA pipeline for the period to 2025. This study produced a projected demand increase as a percentage of 2022 demand and Aberdeen came out joint top in Scotland at 1%, whereas by comparison the figure for Edinburgh was minus 2%. In other words, the supply – demand gap was projected to widen in Aberdeen, and narrow in Edinburgh. This is obviously only one study, and the results are close, but it does indicate that there may be opportunities for developers in the Granite City.
An additional benefit in developing and investing in Aberdeen and Dundee is that although student numbers at the likes of St. Andrews, Edinburgh and Glasgow are already at bursting point, the pressure is less intense in Aberdeen and Dundee. But for the reasons explained earlier around the attractiveness of UK universities to both domestic and foreign students it is highly likely that students will turn to universities and higher education establishments in the likes of Aberdeen and Dundee which are regarded as equally prestigious and where there might, on balance, be less competition for higher education places and, consequently, available beds.
PBSA rents in Edinburgh currently start at around £200 per week. That is only a couple of pounds off the entry rates in Oxford. By contrast PBSA rents in Aberdeen currently start at around £150 per week and in Dundee, which is widely regarded to be the most reasonably priced place for students to live in the UK, accommodation can start at as low as £120 per week.
Put simply, in Aberdeen and Dundee there is arguably more opportunity for growth in student numbers, more potential for growth in student rents and consequently more attractive prospects for commercial property developers and investors to increase capital values as compared to the more saturated cities in Scotland.
Morton Fraser Lawyers’ real estate team consists of over 65 expert lawyers who are among the most qualified and best ranked in Scotland.
Get in touch with Morton Fraser Lawyers for advice on student housing in Aberdeen and beyond.
