In our latest edition of the BONARD Blog Series focused on private purpose-built student accommodation (PBSA) market, we look at the latest developments from Q1 2022 and their impact on Q2 2022.

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The previous quarter has seen major capital deployments in the market.

Investors’ ongoing interest in the student housing asset class was confirmed by several significant transactions concluded or proposed at the end of 2021. BONARD’s daily monitoring of the latest trends reveals investment momentum also continued through Q1 2022.

In terms of challenges, rising inflation and higher commodity prices have been pushing up the capital expenditure levels for construction costs, FF&E and labour globally, but it is too early to assess the impact, if any, of the ongoing conflict in Ukraine on investment appetite within and/or outside the CEE.

 

Based on current data and insights, BONARD expects the following trends for Q2 2022 and/or later:

a) The exit capitalisation market value of standing assets may rise even faster, due to rising inflation and building costs across all asset classes. Moreover, rent levels throughout the year may well be exceeded by inflation, and it remains to be seen how and whether inflation will affect rents beyond 2022.

b) Given rising construction and utilities prices, initial yield levels will continue with the compression towards the exit yield levels, which may present an even narrower margin for value-add or opportunistic capital strategies. Market knowledge and specialised research are expected to be even more important in decision-making processes.

Lack of green-field or brown-field opportunities will push up the value of existing assets or assets that can be repurposed or retrofitted (e.g., offices or hotels to rented residential). Hybridisation of proposed products may offer a partial solution: combinations of rented residential sectors with built-to-sell and/or retail & office asset classes have appeared, providing capital security with a diversification of investment risk.

The anticipated focus on Southern Europe (Iberia and Italy) among investors was confirmed during stakeholders’ conversations at MIPIM. The lack of quality accommodation and generally rising trends in inbound international student numbers still present a good opportunity, as seen in the investments or developments announced in the region.

Certain trends in the portfolio strategy approach of established stakeholders within the student housing asset class give a snapshot of market sentiment.

Two approaches are anticipated:

a) Asset consolidation, with a focus on portfolio strengthening. This approach keeps the trend of portfolio market value increasing over time.

b) Stakeholders who have been holding on to assets and portfolios for longer may be motivated by capital consolidation to sell current assets or portfolios in order to invest elsewhere. In several cases, parts of existing portfolios have been dropped.

c) The growing mobility of students, young professionals and other relevant cohorts is expected to have a positive effect on development in the rented residential sector into 2022. The profitability of development in this asset class might decrease due to rising inflation, though it is thought that the trend will be temporary.

d) In this regard, increasing rent levels seem to be one of the key tools to balance the expenditure vs profit gap. Achieving this balance and staying competitive will require stakeholders to professionalise their PBSA services as well as to offer an attractive product.

To end these insights on a positive note, we can disclose that BONARD is preparing its regular annual rent level update with predictions that in September 2022, some geographies will see double-digit growth in rent levels over 2021.

BONARD Research Team

Patrik Pavlacic

Head of Research

Julia Momotiuk

Head of Rented Residential

Lukas Vilimek

Head of Strategic Intelligence

 

Further information

Read more on student housing in our latest Student Housing Annual Report 2021 here:

Previous Student Housing Blogs
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