The case for student accommodation in the U.K. is exemplified by the recent experience of David Seivright, a bright and ambitious 18-year- old teenager, who received final confirmation of acceptance for an undergraduate programme at the University of Kent in 2021. Unbeknownst to David, who was excited at the prospect of college, were the challenges he would have had to overcome to secure a bed in his future university town. And David was not alone in this struggle.

In recent years, a growing number of students have been desperate to find suitable and affordable accommodation. The shortage is so acute that pupils’ adversities in the media became a national sport, commonly referred to as the “UK student housing crisis”. “Devastated UK students forced to live in neighbouring cities in university accommodation crisis”, an article from The Guardian wrote in 2022. “Undergrads could start the term in hotel rooms ...or in completely different cities” titled the Daily Mail in August this year. These headlines reflect the grim reality facing students from Glasgow to Bristol, from London to Manchester where a worsening demand-supply imbalance is pushing rents higher without solving the underlying shortage of suitable accommodations. And there lies the investment thesis for student housing in Great Britain in a nutshell.

Estimates show that the shortfall of student beds across the UK’s top 20 university towns and cities increased to 240,000 in 2023, an unprecedented level amounting to a crisis in housing. The gap is causing negative effects at multiple levels, including much longer commutes, higher rents, deprivation, and even mental health issues in the most extreme cases. Thus, economically disadvantaged students have to sometimes defer their degree programmes or abandon them altogether due to the lack of suitable accommodation. The new phenomenon of couch surfing by students descriptively demonstrates the dire situation some pupils are facing. Should the emergency continue or worsen, the international reputation of UK higher education, an economic powerhouse whose exports amount to roughly £23bn per year, may also take a knock.

How did the situation escalate this far? And most importantly, what can the investment management industry do to alleviate the problem? These are the two main questions addressed in this paper.

EXHIBIT 1: Student housing press review points to a severe shortage

Image that shows multiple article headlines from a variety of sources, all stating that there is a student housing shortage.

Source: Various media outlets, 2023

High education demand has boomed... and is yet to slow down

There are several factors that have led to the current student housing crisis in the UK. A key driver of the abysmal state of student living is the steady expansion in the student population which has constantly grown over the past decades. In post-war Britain there were fewer university students than in most other Western European countries. Higher education was considered a path only a small elite group could follow and afford. In those days, the number of the “chosen few” was below 200,000 people, of which women accounted for merely a quarter.

A structural change occurred during the 1960s when parliament and public opinion embraced the principal that an inclusive (rather than elitist) higher education model was a desirable goal to pursue. By expanding the university provision, Parliament argued that society at large would benefit from the spreading of knowledge, the uplift of labour force skills, and the advancement of the economy. The new golden rule was to build a larger and fairer tertiary education system where all applicants with appropriate attainment and ability who wished to attend it should find a place. Those years marked the birth of the mass higher education model we have today, which revolves around a centralised admissions service and a national financial support system. These reforms allowed a larger set of young people to attend university, attracted by the prospects of a professional career and higher relative wages.

EXHIBIT 2: The remarkable rise of UK higher education student population
Higher education student population in the UK over 1960 -2022, thousand people

Bar chart

Note: 2022 figure includes alternative providers
Source: HESA, London School of Economics, 2023

Since then, the increase of the student body has been remarkable. Participants in UK universities reached a new all-time high in 2022, when the total number of enrollments jumped to a record 2.86 million, driven by an increase in both domestic and international students, which accounted for 76% and 24% of the total respectively.

The growth in foreign intakes have been particularly strong over the last decade. Brexit and the COVID-19 pandemic notwithstanding, concerns over a trend reversal due to higher fees, travel restrictions and coronavirus prevention measures were soon blown away as applications from international students continued to surprise on the upside.

Estimates for future demand shows the growth trajectory is likely to continue as the number of people between 15 to 19 years of age is forecast to rise by 400,000 people from 3.1 to 3.5 million between 2020 and 2035 in the UK, according to official figures from the Office of National Statistics (ONS). Meanwhile, demand from overseas is also set to increase, amid favourable socio- demographic trends in developing markets - China, India and Nigeria are the top three domiciles of international students in the UK - and expanding global student mobility. In other words, there exist all the ingredients for the student housing crisis to spread more broadly in the years ahead, should the new supply of beds not ramp up accordingly.

EXHIBIT 3: The UK has the second largest number of student population after the U.S.
Evolution of foreign students intake over 2000-2022, thousands

Bar chart

2022 data available from the UK only
Source: PMA, 2023

EXHIBIT 4: Global student mobility is rising
Global international mobile students, millions

Bar chart

Source: OECD, 2022

Real estate

Risk Considerations
Past performance is no guarantee of future results. Investing involves risk, including possible loss of principal. Potential investors should be aware of the risks inherent to owning and investing in real estate, including: value fluctuations, capital market pricing volatility, liquidity risks, leverage, credit risk, occupancy risk and legal risk. All these risks can lead to a decline in the value of the real estate, a decline in the income produced by the real estate and declines in the value or total loss in value of securities derived from investments in real estate. Inflation and other economic cycles and conditions are difficult to predict and there Is no guarantee that any inflation mitigation/protection strategy will be successful. International investing involves greater risks such as currency fluctuations, political/social instability, and differing accounting standards.

Important Information
This material covers general information only and does not take account of any investor’s investment objectives or financial situation and should not be construed as specific investment advice, a recommendation, or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding an investment or the markets in general. The opinions and predictions expressed are subject to change without prior notice. The information presented has been derived from sources believed to be accurate; however, we do not independently verify or guarantee its accuracy or validity. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that the investment manager or its affiliates has recommended a specific security for any client account.

Subject to any contrary provisions of applicable law, the investment manager and its affiliates, and their officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy and any responsibility arising in any way (including by reason of negligence) for errors or omissions in the information or data provided. All figures shown in this document are in U.S. dollars unless otherwise noted.

This material may contain ‘forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

This material is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

This document is issued in:

  • The United States by Principal Global Investors, LLC, which is regulated by the U.S. Securities and Exchange Commission.
  • Europe by Principal Global Investors (Ireland) Limited, 70 Sir John Rogerson’s Quay, Dublin 2, D02 R296, Ireland. Principal Global Investors (Ireland) Limited is regulated by the Central Bank of Ireland. Clients that do not directly contract with Principal Global Investors (Europe) Limited (“PGIE”) or Principal Global Investors (Ireland) Limited (“PGII”) will not benefit from the protections offered by the rules and regulations of the Financial Conduct Authority or the Central Bank of Ireland, including those enacted under MiFID II. Further, where clients do contract with PGIE or PGII, PGIE or PGII may delegate management authority to affiliates that are not authorised and regulated within Europe and in any such case, the client may not benefit from all protections offered by the rules and regulations of the Financial Conduct Authority, or the Central Bank of Ireland. In Europe, this document is directed exclusively at Professional Clients and Eligible Counterparties and should not be relied upon by Retail Clients (all as defined by the MiFID).
  • United Kingdom by Principal Global Investors (Europe) Limited, Level 1, 1 Wood Street, London, EC2V 7 JB, registered in England, No. 03819986, which is authorised and regulated by the Financial Conduct Authority (“FCA”).
  • This document is marketing material and is issued in Switzerland by Principal Global Investors (Switzerland) GmbH.
  • United Arab Emirates by Principal Global Investors LLC, a branch registered in the Dubai International Financial Centre and authorized by the Dubai Financial Services Authority as a representative office and is delivered on an individual basis to the recipient and should not be passed on or otherwise distributed by the recipient to any other person or organisation.
  • Singapore by Principal Global Investors (Singapore) Limited (ACRA Reg. No. 199603735H), which is regulated by the Monetary Authority of Singapore and is directed exclusively at institutional investors as defined by the Securities and Futures Act 2001. This advertisement or publication has not been reviewed by the Monetary Authority of Singapore.
  • Australia by Principal Global Investors (Australia) Limited (ABN 45 102 488 068, AFS Licence No. 225385), which is regulated by the Australian Securities and Investments Commission and is only directed at wholesale clients as defined under Corporations Act 2001.
  • Hong Kong SAR (China) by Principal Asset Management Company (Asia) Limited, which is regulated by the Securities and Futures Commission. This document has not been reviewed by the Securities and Futures Commission.
  • Other APAC Countries/Jurisdictions, this material is issued for institutional investors only (or professional/ sophisticated/qualified investors, as such term may apply in local jurisdictions) and is delivered on an individual basis to the recipient and should not be passed on, used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to local law or regulation.

© 2023 Principal Financial Services, Inc. Principal®, Principal Financial Group®, Principal Asset Management, and Principal and the logomark design are registered trademarks and service marks of Principal Financial Services, Inc., a Principal Financial Group company, in various countries around the world and may be used only with the permission of Principal Financial Services, Inc. Principal Asset Management℠ is a trade name of Principal Global Investors, LLC. Principal Real Estate is a trade name of Principal Real Estate Investors, LLC, an affiliate of Principal Global Investors.

MM9914-08 | 10/2023 | 3150160-122025

About the author