Why the U.K.’s Once-Hot Student Housing Sector May Be Cooling Off

Student housing in the U.K. has been a popular niche for real estate investors in recent years, thanks to a sharp increase in the student population coupled with a housing shortage. But some market observers say the party may be over soon and are cutting their rental growth forecasts amid expectations that yields on some student properties will fall.

Over the past decade, the U.K.’s higher education sector has been growing fast — and as student numbers have swollen, demand for accommodation has also grown. Years ago, universities put up students in their own housing stock, or in purpose-built dwellings that they owned. But the sharp increase in student numbers meant universities could no longer offer accommodation for all of their new undergraduates, and specialist student accommodation providers stepped in to fill the void.

The number of institutions offering degree programs has expanded in recent years, with some former higher education institutions becoming universities and obtaining their own degree-awarding powers and established universities opening new campuses or lending out their name to independent colleges so degrees can be taught in their name.

The result has been an explosion in student numbers, populated by increased domestic and international interest. Figures from the Universities and Colleges Admissions Service (UCAS) show that the number of students enrolled in a university course between 2013 and 2016 rose by more than 40,000.

For investors, student accommodation has been hugely popular. The lack of supply meant that student apartment blocks could be easily filled, providing a predictable yield, funded by the rent-paying scholars.

According to data from the Association of Real Estate Funds, in the five years to the end of June 2017, the £2.3 billion($3.02 billion) Unite UK Student Accommodation real estate investment trust has delivered an annualized return of 14.4 percent each year when net income was reinvested. According to the Savills’ UK Student Housing report, £5.3 billion was forecast to be invested in the U.K. student property market in 2017.

Egbert Nijmeijer, senior portfolio manager at Dutch investment group Kempen Asset Management, explains that he has been invested in the Unite Group for the past six years and says he loves the sector.

“Student housing in the U.K. is a well-developed sector and the influx of international students into the U.K., especially from Asia, has grown significantly,” he explains.

However, investors such as Nijmeijer have revised down their rental growth forecasts this year and are predicting that the net initial yields on some student properties will fall.

The reasons are two-fold. First, the supply/demand dynamic that has long favored investors in the sector is shifting. An explosion of investor interest has resulted in lots of new developments.

The second issue is that the number of students joining university has dropped for the first time in recent years. UCAS figures show that the 2017 intake had a dip in the number of placed applicants, from 511,980 in 2016 to 505,680 in 2017.

Despite these potential challenges there is no data, as yet, to suggest that the sector will falter. But investors may now want to temper their predictions for future yields, due to increased competition and the potential for a lower student population in the longer term.