It’s full marks for this investment opportunity

Chris McDaid is a partner at Brodies LLP​

In recent years, Purpose Built Student Accommodation (PBSA) has become an increasingly familiar sight in Scotland's major cities. Bearing more of a resemblance to upmarket hotels than traditional student halls of residence, and despite often having a rental price tag to match, PBSA is popular with students, particularly international students coming to study in Scotland.

It has increasingly become the development of choice in Scotland for many investors and developers, keen to meet substantial demand during a period where more traditional property sectors, such as retail and offices, have faced challenges. Indeed, analysis conducted by BNP Paribas reveals that investment in the UK’s PBSA sector increased to £1.7 billion in the first six months of 2024.

Looking ahead, there are both challenges and opportunities for the PBSA sector, which has not been immune to issues facing developers in other markets. Construction costs have been high for a long period, affecting the pace of new development, and the availability of finance has been constrained over the past two years. And, while a record high of almost 29% of all students in Scotland in 2022-2023 were international, Universities Scotland believes global events and changes in UK immigration policy could risk a dip in those numbers.

But a feeling is emerging that costs may be stabilising. With the Bank of England having cut interest rates and making encouraging noises about further cuts if inflation remains under control, it’s hoped financing costs will start to come down. Domestic demographic growth looks favourable, with the number of 18-year-olds eligible to enter into further education set to increase over the next five years.

Politics will have a part to play too. The draft Housing Bill currently going through the Scottish Parliament proposes rent controls for private residential tenancies, but contains no provisions to control rents under PBSA tenancies. This is adding to the sector's popularity as an investment class compared to other elements of the private rental sector. The Scottish Government is currently surveying both students and PBSA providers on whether students should be entitled to terminate PBSA tenancies on 28 days' notice, bringing them in line with private residential tenancies.

Planning will also play a big part in shaping the future of PBSA. Planners have generally warmed to PBSA, leaning into the positives it can bring to towns and cities, including regeneration of areas left vacant in our city centres to reintroduce a sense of "living". If PBSA-only developments are not right for certain locations, we could perhaps learn from countries like the Netherlands and Denmark, where intergenerational living is operating successfully.

Student groups, universities and the Scottish Government are calling for more affordable accommodation for students, and planners are responding through the conditions they attach to PBSA applications. Providing affordable accommodation and at the same time delivering a good quality, financially viable PBSA scheme, is a key challenge.

Proposed solutions include collaboration between educational institutions and the private sector to refurbish and reshape existing PBSA stock, and the conversion and refurbishment of other types of buildings falling into disuse, such as offices. This approach sits well with the green agenda, employing the circular economy and reusing existing buildings and materials wherever possible, to reduce the carbon footprint of developments.

Having proven its resilience as an asset class in recent years, notwithstanding a pandemic and economic shocks, PBSA cannot and will not stand still.