Is investing in student accommodation a good idea? Exploring the higher education market

Student accommodation and/or housing remains a popular option for property investors and portfolio landlords. In fact, our Q1 report revealed that student accommodation ranks towards the top of real estate options in terms of desirability, with only BTL assets proving more tempting.

But, in the current market, is investing in student accommodation a good idea? Also, what options are actually available to property investors?

This blog will answer these questions and more. While the success of any investment will depend on the underlying investor’s circumstances, there are a few key details that everyone should factor in and take onboard.

Defining student accommodation and how to invest in student housing

Generally, there are two main types of student accommodation landlords can invest into: houses in multiple occupation (HMOs) or purpose-built accommodation[1].

Large properties are used for HMOs, where they’re tweaked to turn former reception or office rooms into bedrooms. In HMOs, students share bathroom and kitchen facilities. These are considered the “traditional” house share for those in higher education.

Purpose-built student accommodation (PBSA) can include properties with en-suite rooms, self-contained “pods”, or individual flats. They’re often found in city-centres and may have certain amenities while being close to the university in question.

There may also be options outside of these obvious choices however. Commercial property, especially office blocks, can be converted into new flats specifically targeted at a local student population. Also, bargains may be found at an auction, where the properties on offer may just need some cosmetic changes to attract new tenants.

In terms of the best places, when looking at where to invest in student housing, there are several options open to investors. Derby, according to analysis from Molo[2], currently has a combination of ‘good’ yields available, a large student population, and a lack of available supply.

In terms of popularity with the students themselves, Birmingham Newman University takes the top spot for student satisfaction[3]. Meanwhile, University College London is the largest university in the UK by enrolment[4] (behind The Open University). Evidently, there are multiple routes for targeting the student housing market.

While there are plenty of options available, this doesn’t answer the question of is investing in student accommodation a good idea. For this, we need to look at demand.

Is investing in student accommodation a good idea in the current market and beyond?

Despite any potential drawbacks, young people are still drawn to higher education. Nearly 317,000 UK 18-year-olds applied to university or college in the most recent academic year, according to UCAS[5]. This was an increase of 0.7% from 2023, and the second highest level on record.

Demand from students is unlikely to slow down either. UCAS expects that higher education applications could rise by as much as 41% by 2030, in comparison to 2022[6].

As more students flock to university, they’ll need somewhere to live. Looking at current trends, we’re not on track for meeting the demand.

Savills recently warned that UK cities need “much higher rates of student housing delivery[7]”. It found that, across 20 key student markets, an extra 234,000 PBSA beds are needed to keep the market on a stable footing. In London alone, 100,000 beds are needed.

Similar results can be found elsewhere. Analysis of the latest student accommodation statistics showed that there’s going to be 2.2 million students needing accommodation by 2026[8] – a rise of nearly 39% since 2021. But, we could actually end up facing a shortage of 621,373 beds in 2026, the result of a lack of both PBSA and HMO options.

Meanwhile, Cushman & Wakefield[9], the global real estate services firm, found that the national demand for student accommodation sat at 1,489,110 students in 2023/24. But, the net increase in beds for the 2023/24 academic year was just 8,760. The vast majority (96.4%) of students seek housing at some point during their academic years across 74 different locations in the UK.

There is no getting away from the fact there is a clear need for more student housing in the UK. But this isn’t the only factor that needs to be considered. Investors need have an incentive to act. Fortunately, the student housing market offers potential for expanding landlords.

Be mindful of what’s going on in the economy and news

Student accommodation investment yields can be relatively high. The CBRE’s PBSA Index[10] revealed an average total investment return of 10.78% in the last 12 years. Moreover, Allsop found that yields on HMOs in some university towns and cities can be as high as 12-13%[11]. Comparatively, the average gross yield across the BTL market sat at 6.1% in Q1 2024[12].

Although, while the student market offers plenty of potential, there are a few potential drawbacks investors need to be aware of. Logistically, finding tenants will likely be relatively easy, but investors may need to look for new ones every year or two. Additionally, properties may end up unoccupied in the summer months as students go on holiday or return home. This could cut rental income, at least for a few months.

Additionally, student HMOs will be subject to stricter regulation than ordinary buy-to-let properties. For example, fire doors will need to be installed and maintenance costs are also likely to be high. Local councils may ask for specific licences.

The tenants themselves could also prove costly. Investors may end up with tee-total renters who do nothing but study and are asleep by 9pm. But, there’s a strong chance they’ll also be opening up their properties to party animals who have zero chance of getting their deposits back! Student landlords may want to set money aside for repairs and refurbs.

Legislative challenges may also have an impact. Universities themselves are facing a funding crisis[13] and calls are emerging for the state to raise tuition fees[14]. If this comes to pass, it may cut university applications. Also, the tightening of graduate visa rules[15] risks limiting how many international students move to the UK[16].

Is it worth it?

So, is investing in student accommodation a good idea? Why invest in student accommodation at all if there are so many risks? Well, as with any investment, the answer is: the success will depend on individual circumstances, and investors should seek advice.

Generally though, diversity is key, and student accommodation could easily sit alongside a commercial unit, residential asset, and a mixed-use property, if it’s right for the investor. At MFS, we have funding available for all these property types and more. If property investors want to target a new and potentially lucrative market, we may be able to help.