Studying the rent rises

The purpose-built student accommodation (PBSA) sector emerged from the Covid crisis relatively unscathed, with solid demand levels and occupation rates. But a new trend has now become evident: rents keep increasing. In some regions, they are rising at a much higher pace than previously observed. Rent levels have been growing steadily in the last few years in the private PBSA sector by around 1–3 pct on average. However, new research conducted by the rented residential specialist Bonard shows that, on average, rents increased by 9.7 pct (970 bps) in the academic year ending September 2022, with some very significant spikes occurring in the CEE region.

What’s driving this new trend?

According to research by Bonard, which included an analysis of rents charged by 172 private PBSA providers across Europe and one-on-one discussions with players in the sector, the reasons behind this trend are shaped by the interplay between increased demand and rising inflation and interest rates. On the one hand, the growth in rents could be the price of the sector’s own success: with high occupancy rates and ever-growing demand, the sector can comfortably set higher rents. New, higher-quality PBSA products are also entering the market, boosting the average rent value. Rising inflation and interest rates are creating the conditions for sustaining a high level of demand for PBSA. In this unfavourable economic climate, fewer people will be capable of buying a property. At the same time, increased economic migration is likely. Both these trends will increase demand for private rental properties from the general public, pushing more students out of the private rental market and into PBSA.

On the other hand, rising inflation and interest rates are creating substantial challenges for the sector. Due to the rate of inflation, both existing PBSA operators and developers have seen costs climb: staff, utility, maintenance and construction costs have all been impacted, as well as the operation costs for non-hedged contracts. Rising interest rates are also making debt obligations more challenging for some developers to sustain. Our research, and the feedback we have gathered from key players in the sector, shows that the high student demand will allow private PBSA providers to continue increasing rents. This will help to offset the effect of growing costs. Currently, the student housing market in Europe is facing a series of challenges, and confronting them successfully is crucial to the further development of this sector.

Geographical differences

Beyond the general upward trend common across Europe, a much more interesting story emerges once geographical differences are considered. It is clear that the CEE region is experiencing much steeper rent increases than Western Europe. In the CEE region, the increase in rates reached an average of 17.4 pct (1,740 bps), dwarfing the 3.1 pct (310 bps) rise seen in Western Europe.

Bonard has surveyed 141 establishments in Western Europe and 31 in other European countries. Lithuania experienced the sharpest rent increase: 44 pct (4,400 bps). The second most significant change was observed in Latvia (19.6 pct, or 1,960 bps), followed by Poland and the Czech Republic (13.6 pct and 13.5 pct, or 1,360 bps and 1,350 bps, respectively). At the other end of the scale, Portugal and Germany showed only a modest 1.2 pct and 1.9 pct (120 bps and 190 bps) increase. The reasons behind these trends are complex, but differences in provision rates between Eastern and Western Europe are playing a key role, with providers in Western Europe limited in their ability to increase rents by a much larger competitor base. In less saturated markets, such as the CEE region, there is more room to increase rents. The private provision rate is much higher in the more developed and mature markets of Western Europe, where it averages 21 pct. In other European countries, this is just above 11.2 pct. This means that operators in the CEE region can adjust rents to adapt to the inflation rate and keep their margins at the desired level, without being limited by their competitors’ pricing.

In addition to this, some operators in Western Europe have relatively stable expenditures that have not yet been impacted by inflation, having hedged their costs via long-term contracts with service and materials suppliers. This will allow them to keep rents lower for the moment. The war in Ukraine is also having a substantial impact on the rental market in the CEE region. The increased movement of people and businesses, not only out of Ukraine but from Belarus and Russia as well, has resulted in a huge influx of renters, which is putting pressure on the region’s comparatively limited supply and will potentially transform the local market dynamics in the years to come. While it’s difficult to make any predictions, it’s fair to assume that some people and businesses will relocate permanently, creating a high level of demand that will persist to some extent after the end of the conflict.

The outlook

With growing demand and high occupancy rates, the sector has been able to offset some of the costs associated with the current economic trends by raising rents. It is still unclear how this trend will continue into next year, but inflation is unlikely to return to pre-Covid levels in 2023/24. Operating in these turbulent economic times, PBSA operators, as well as other sectors and businesses, are currently in the waiting game. However, PBSA is a resilient and profitable asset class even in unfavourable economic conditions, as investors are not as exposed to inflation as they are in other sectors. Unlike with retail or office leases, for example, PBSA rents change every year, if not more frequently, and can be adjusted to rise above inflation. This feature of the PBSA sector will prove crucial to its continued success, especially as we move into a period of likely persistently higher inflation rates compared to those the market was used to in the 2010s, after the Great Recession.

FOR ALL THE RESI-RENTAL FUNDAMENTALS

Bonard is a global market research and advisory firm assisting with data, strategies and assessments in rented residential asset classes, including student housing, micro living, co-living, senior living, serviced apartments and build-to-rents. Its team of over 50 researchers and analysts operating in four offices around the world provides the highest level of secondary and primary in-field data (street level/ground interviews). The company provides up to 250+ key performance indicators per city as well as data on demand, supply, portfolios, prices, pipeline or customer preferences for over 200 cities.