European student accommodation: testing the theory
As the new academic year kicks off, students in Europe are confronted with a shortage of good-quality student accommodation. Relative to the UK, the purpose-built student accommodation (PBSA) market in Europe is at a much earlier stage in its evolution.
The demand for higher education in Europe is rising, driven by a steady increase in domestic and international students. In 2002, only 22.5% of adults living in the EU were educated to degree level. By 2021, that figure had risen to 40% - the European Commission's long-term target . Momentum remains strong, with access to tertiary education still under the spotlight. In 2022, student enrollments increased or remained stable in 87% of European cities. Rising international student populations are further exacerbating the demand in Europe, too.
With limited supply, these fundamental drivers are creating a compelling opportunity for investors to source long-term stable cashflows from the sector. Investment in European PBSA hit €15.4 billion in 2022. This was 47% higher than 2021, 37% higher than 2019 (pre-Covid levels), and 39% higher than the five-year average. Our research on more mature PBSA markets, like the UK, demonstrates how this opportunity can evolve.
Examining the provision rate
In 2022, PBSA occupancy rates averaged 98% in Europe's major cities , a level that far exceeds commercial real estate sectors. The demand has also been counter-cyclical to gross domestic product. When there's a downturn in the economy, the demand for student beds rises as more people either enter tertiary education or extend their studies beyond undergraduate degrees. Even during the pandemic and strict lockdowns, university admissions remained resilient and even grew in some cases.
However, the provision rates tell the true story. The average provision rate (defined as the student-to-bed ratio) in Europe is 25%. This ranges from 4% in Italy to 33% in the UK. At a city level, London is 31%, Amsterdam is 29%, Copenhagen is 21% and Munich is 15% . With high inflation, debt and construction costs, development activity is insufficient to absorb current and future demand from both domestic and overseas students. Even if all planned developments go ahead, the European provision rate will remain less than 15%.
This leaves students at the mercy of individual landlords in the private rental market, which can mean they end up living further away from university campuses. Private accommodation is often more costly because of open-market rents, non-inclusive energy bills, travel, and extra costs for entertainment and facilities. Importantly, a lesser 'student experience' means institutions risk falling behind the current expectations of domestic and international students in an increasingly competitive environment.
'Internationalisation' in higher education
'Internationalisation' is the process of integrating cross-border students into European institutions . The top 10 universities in Europe are in the UK and Germany, of which international students account for between 19% and 73% (London School of Economics 73%, University of Oxford 42%, ETH Zurich 41%, and LMU Munich 19%) .
This proportion has grown considerably in recent years, owing to a rise in English Taught Bachelors (ETBs), which accommodate a broader range of students. The UK, Germany, the Netherlands and Italy comprise the largest population of English-taught students. International students tend to want higher standards of accommodation in bespoke premises, with higher security than domestic students. A shortage of suitable PBSA stock is a limiting factor for institutions that want to attract this important source of revenue. For investors, this type of PBSA can provide scope for specialisation, with higher premium units and longer-term lets available for overseas students.
Chart: Countries accounting for highest past enrolments
Source: Studyportals, abrdn, June 2023
Diversifying the student base
For European PBSA assets, it is less common for investors to have a lease with a university or a business operator. It is more typical to have exposure to individual tenants and turnover. This is critical as the risk of higher void rates can have a more direct impact on performance in European PBSA. Schemes that are backed by a diverse range of international students tend to support more resilient cashflows. Where there is a strong dependency on one source of international student, there is a risk that the source slows or is diverted.
Brexit is a good example of a structural shift that can happen almost overnight. The number of EU students coming to the UK plummeted by 50% in 2022, after Brexit-related changes meant they lost their discount on tuition fees. Non-EU international students have filled these places, but this has changed the dynamic in the UK market. In addition, student visa reforms and anti-immigration laws hinder future enrollment rates from Europe, in particular.
In the UK, the highest number of international students are from China, India and the US. European student flows are more fragmented, though, driven by a shared colonial history, languages, politics and geographical relationships. In France, most students are from Africa, given the shared colonial ties; Portugal has the most Brazilian students because of their colonial and economic links; and Austria and Germany receive students from each other as they share a common language and are neighbouring countries. The chart shows the differences in student flows and the implied opportunities and risks within the international student mix. The diverse range of international students is a distinct advantage for European PBSA.
With the UK government introducing stricter policies, EU institutions are an emerging alternative for international students. This trend could allow the EU to close the gap on the UK. It's not a one-way ticket, though. The Netherlands is another maturing PBSA market that is home to many top universities and international students. But it could cap international student enrollment and recruitment in the future. The tight housing market in major Dutch cities is a major political issue and there are simply not enough beds to supply all students with good-quality accommodation.
It's all about distinction
Given the demand and supply fundamentals, we believe there will be strong potential opportunities for investors to grow meaningful allocations in good-quality and well-located European PBSA.
The deglobalisation trend that has been fuelled by geopolitics, means investors cannot simply 'wing it' when it comes to European PBSA. It is important to focus on the best university towns and cities, backed by the most diverse range of student flows, and a strong and growing domestic student population.
Author: Hong Bui, Real Estate Investment Analyst, Europe, abrdn
Funds operated by this manager:
Aberdeen Standard Actively Hedged International Equities Fund, Aberdeen Standard Asian Opportunities Fund, Aberdeen Standard Australian Small Companies Fund, Aberdeen Standard Emerging Opportunities Fund, Aberdeen Standard Ex-20 Australian Equities Fund (Class A), Aberdeen Standard Focused Sustainable Australian Equity Fund, Aberdeen Standard Fully Hedged International Equities Fund, Aberdeen Standard Global Absolute Return Strategies Fund, Aberdeen Standard Global Corporate Bond Fund, Aberdeen Standard International Equity Fund, Aberdeen Standard Multi Asset Real Return Fund, Aberdeen Standard Multi-Asset Income Fund