Many of Europe’s major cities are facing significant housing shortages that impact households of all ages, particularly affecting younger people in general and students the most. The question facing policy makers is how to address these shortfalls, and mainly, where the funding can be found to build additional, affordable housing. 

The PBSA market has proven to be an attractive sector for institutional investors who have invested substantial sums in Europe’s premier academic cities. The fundamentals have been compelling with interest accelerating since the end of pandemic lockdowns. Student numbers have risen across Europe, helping to drive demand for student accommodation.  

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A sustainable investment framework for student housing  

PBSA investors could be further encouraged to consider the added sustainability benefits of funding additional and affordable housing to meet the needs of students, making an added positive impact by financing solutions to social challenges. There may be significant “social” benefits from helping to address shortages which could be attractive to asset owners looking to achieve social — alongside environmental — impacts from their investment decisions.  

Under these circumstances, policy makers might be forgiven for believing that the financial markets could provide an attractive source of additional capital to address the problem of housing shortages. Firstly, it is debatable whether there is even sufficient capital available currently. Additionally, is the investment proposition attractive enough, given the increasingly complex financial demands made of investors by regulators and policy makers in Europe? And, perhaps more pertinently, does this allow politicians and policy makers, as well as academic institutions, to avoid taking responsibility for tackling the problem? 

The student housing alternative

The attractiveness of student accommodation has grown for both real estate and infrastructure investors in public and private markets over the last decade. There are now hundreds of companies investing in European student housing, attracted by growing demand from foreign students, limited supply, and rising rents. Additionally, they are interested in the prospect of regular dividend payments and earnings growth, alignment with the strongest universities, growth opportunities through development, and improved access to new capital. Furthermore, PBSA and the fundamentals of the broader “living” sector are becoming increasingly seen as better investment alternatives as time goes on, to traditional commercial property sectors like offices and retail. 

Alongside burgeoning demand, the persistent lack of housing contributes to the compelling case for investing in student housing. A research paper by JLL highlighted a shortage of student accommodation of around 2.6 million beds at the end of 2021 in Europe.  

Given the current global economic backdrop, investors value its reputation as one of the less cyclical and volatile real estate sectors. The market fundamentals appear to be solid in this post-COVID era. All the signs point to the segment being supported by positive property market dynamics that are absent from many of the more cyclical European property sectors. 

Impacting housing shortages 

Student housing has also become recognised as a responsible or ESG investment opportunity. PBSA property is typically newly built and adopts the latest energy-efficient saving measures and building standards like LEEDs certifications, allowing investors and asset managers to fulfil their sustainability objectives.  

Nonetheless, some critics of investing in ESG question the sustainability credentials of PBSA investments. They doubt whether investors can claim to be making sustainable investments if they are not making sufficient efforts to address the lack of access to appropriate and affordable housing for many young people in education. This shows an undeniable opportunity for investors to make an additional social impact.  

Consequently, investors could consider where PBSA features in their sustainable investment frameworks. Typically, student housing investors have positioned themselves in-between ESG investing and commercial investment (See Table 1). But asset owners could be encouraged to move even further along the spectrum to the sustainable and responsible end of the ESG investment continuum. In return, they may be prepared to accept below-market returns in exchange for potentially higher positive impacts from their investments, such as the provision of additional affordable student housing to tackle acute shortages.

Conversely, is it reasonable to expect investors to solve these complex urban housing shortages, including those affecting young people in further education? Particularly, when investors are facing increasing demands to pay for improvements that raise energy efficiency standards of existing buildings, involving Capex spending that will impact upon return expectations. Is there the financial headroom to develop additional housing? 

Furthermore, the tightening of financial conditions in Europe and the UK has led to higher financing costs which make the calculations around development and refurbishment even more challenging as global capital markets are confronted by rising interest rates and as a result, higher debt costs. 

Transparent and sustainable investing

There’s undoubtedly substantial investor interest in student housing because of its compelling real estate fundamentals. Real estate advisors such as Savills, expect the growth in student numbers to accelerate in the large European university cities, especially in Southern Europe. Thus, demand for student accommodation is expected to remain elevated.

But perhaps investors could do more to help address housing shortages through their investment strategies.

The problem certainly can’t be solved by asset owners and PBSA companies in isolation. However, they could be encouraged to make a greater social impact in addressing the housing problems of young people in education. This will require transparent investment agreements with asset owners and managers prepared to accept lower investment performance in return for greater social impact. 

College administrators, governments, and local authorities need to accept their responsibilities for housing young people in education. Shelter-like student housing options should be considered a crucial component of urban infrastructure that requires sufficient investment and avoids ill-considered levels of regulation. Politicians, planners, and academic institutions need to take the lead in ensuring that the right frameworks are in place so that institutional investors and PBSA providers can help deliver the capital needed to accommodate Europe’s next generation of students.