The sector’s rapid expansion has been tempered by recent financial difficulties. But universities will still have to invest heavily to meet net zero targets, while purpose-built student accommodation continues to attract investors
In a normal world where the economy is increasingly based on information, you might reasonably expect higher education to be a top priority. You might expect money to be flowing in to build more and better places for students to study, socialise and live.
In the UK, you might rank the higher education sector as an even bigger priority than in most other nations. After all, student numbers here have rapidly expand over the past decade as the sector has sucked in more than a fair share of international students. The UK boasts a disproportionate number of the world’s top universities and captures significant income from abroad.
You might think that higher education would be a go-to haven for the UK construction sector, with architects eager to stamp their mark on the temples of education. Sadly, no. In the UK, many universities are in serious financial straits. Jobs are being cut. Salaries are being constrained. Improvements to buildings are being delayed despite the urgency to meet net zero and reduce hefty energy bills.
But despite this much-reported gloomy financial backdrop, there are shafts of light for construction firms and eager architects. Yes, universities will have to invest heavily to meet net zero targets, and soon. But the biggest potential boost for construction is in purpose-built student accommodation, with investors hungry to capture a bigger slice of the student rental market. Though even here, there are scattered dark clouds.
To better understand the conundrums and opportunities facing the higher education sector from a built environment perspective, it is worth starting with the basic ingredient: students. The key point, and the one that reassures investors, is the longstanding rise in student numbers of students, as shown in Chart 1 (above).
The numbers remain high, despite slipping slightly in the academic year 2023/24. On first estimates, they are also down slightly again for the year 2024/25. Nevertheless, they remain close to the record level hit in 2022/23.
Much of the recent growth has been due to a rapid increase in postgraduate and international students. Since the hefty hike in tuition fees in 2012, universities have put far greater effort into attracting foreign students. The higher fees, inevitably, disincentivised some young UK adults from going to university, as can be seen in Chart 2 (below), which illustrates the growth in students with non-UK permanent addresses.
Other factors have contributed to the growth. Competition for international students from the United States eased slightly when that country tightened its visa policies. The more favourable Sterling exchange rate since Brexit has also made UK universities more financially attractive.
With student numbers well up on a decade ago, universities need to play catch-up and improve their estates and other related buildings, notably accommodation. This all bolsters the continued case for investment and excites investors. The Q4 2024 UK Student Market Update from property agent Knight Frank suggested that investment momentum looked set to build in 2025.
Meanwhile, there are strong political, economic and social incentives for local authorities to support the expansion of university estates and related buildings, especially student accommodation.
Universities entice talent along with economic activity, which creates valuable jobs. This is especially attractive to areas with weak or struggling economies. The data suggest that the geographical spread of universities also helps to spread young talent and economic activity across the UK. Moreover, universities can cultivate specialist knowledge that spawns local commercial activity. On top of this, students and lecturers bring spending power to the local area.
As Chart 3 (above) shows, UK students in higher education are more concentrated as a share of the overall population outside the greater south-east (London, the east, and the south east). This suggest that, in terms of the value gained from teaching, higher-education students are well spread across the UK. That said, the benefits gained from overseas students tend to concentrate in the greater south east, with London, Oxford and Cambridge acting as magnets in the international market for higher education.
There can, however, also be negative impacts. The rapid expansion of universities over recent decades has put pressure on local housing markets. The rent extracted from multiple students often greatly outweighs what is affordable to families. So, house prices and rents both rise, which makes accessing housing increasingly unaffordable to locals.
In the past, this has helped to revitalise the housing sector in some poorer areas. But with housing markets now stretched across the nation, the positives are increasingly outweighed by negatives.
Leaving aside any instinctive distaste some locals may have over the encroachment of students within their communities, the impact on housing markets has become an increasingly toxic political issue in some places. This increases the incentive for councils to encourage purpose-built student accommodation (PBSA) to help ease the pressure on the existing stock.
The expansion of PBSA not only acts to release pressure on traditional family housing, it also helps councils meet housing targets and can boost income from the New Homes Bonus. And unlike traditional student halls, self-contained student flats and cluster flats, where a small group of students share facilities, count towards net additional homes, helping councils meet their housing targets.
The potential strength of the PBSA market is clear in the data. In the academic year 2023/24, just 26 per cent of all first-degree students were housed in either private-sector halls or university-maintained properties (which broadly covers PSBA), and this percentage has fallen (Chart 4, above), as student numbers have risen. Students have been increasingly living at a home they or their parents own, renting in houses of multiple occupation, or finding other places to live.
Even for first-degree entrants, fewer than half have places in purpose-built accommodation, with the share varying dramatically by university and across the country (Chart 5, below). The data certainly suggests that the potential demand for new accommodation remains strong in most regions. It would take a dramatic crash in student numbers to create oversupply. That looks unlikely.
In recent years, particularly after the 2012 hike in tuition fees, there has been increasing public questioning of the value to young adults of going to university, with many people arguing that it is not worth it. But the evidence on attitudes and demographics does not support a case for a significant fall in student numbers.
A survey in May 2024 from The Policy Institute at King’s College London found that among those aged 18 to 24 without undergraduate degrees, 43 per cent, when asked if they wish they had attended university, responded: ‘a great deal’ or ‘a fair amount’. Another 18 per cent said they intended to attend to go, with just a third not interested in going.
Meanwhile, of those polled who were graduates, 81 per cent were positive about going to university. Interestingly, the survey suggests it is older people who are more sceptical of the value of a university education.
While the data all points to a strong market for PBSA, the university sector increasingly relies on private sector specialists to supply the stock of new accommodation, either directly or in partnership. The latter approach reflects the symbiotic nature of their relationship, which often forms in deals that share the risks and rewards.
The continued eagerness of investors to fund student accommodation will be a welcome relief for universities as they struggle to navigate turbulent financial waters. Though, sadly, even this piece of the jigsaw is proving frustrating to fit into place.
The fallout from the Grenfell tragedy has rightly been widespread. But the impact of recasting woefully inadequate regulation comes at a cost. It can take time to bed in and time to adjust the resources needed to provide adequate and efficient oversight. A slowdown in delivery is often the outcome.
That is what the PSBA sector is now facing. Unite Students, a major provider of student accommodation, in the review of its 2024 financial results, states: ‘The Building Safety Act addresses the safety of new residential accommodation by adding three gateways to the design, build and occupation of new buildings. We expect these gateways will add around six months to PBSA development programmes once embedded, putting pressure on returns and further slowing new supply.’
This adds to both cost and time pressures on the sector, given most new student accommodation tends to be high-rise. But before the new approach to delivering high-rise residential buildings has settled, it is likely to add uncertainties.
As for investment in other aspects of the higher education estate, the picture is likely to be patchy, heavily influenced by the degree of financial distress suffered by each university.
Unpicking the direct causes and anticipating the effects of these financial problems is complex and will vary by institution, with some thriving, some stable, and others struggling badly. Many in the latter group are the former polytechnics, which in 1992 were converted to universities. Most of Britain’s elite universities fall into the thriving category. So, it was a shock to many when the University of Edinburgh recently warned of staff cuts to curb a £140 million financial deficit, equating to about 10 per cent of its annual turnover.
Finding a sustainable way to fund higher education has been a challenge for decades, as the system shifted from free access and support provided for one in ten young adults in the 1970s, to today’s more market-based approach encompassing around half of young adults. Critically, fundamental changes in 2012 to the funding model left universities more dependent on tuition fees and more open to the vagaries of the market than in the past. And caps imposed on fees have failed to keep pace with inflation, inevitably creating tension.
Attracting more overseas students benefits universities’ finances and boosts the nation’s trade balance, but it adds risk. Universities have no control over visa regulations, or turbulence in international relations that might lead to a sudden fall in students from one nation or another, or over any other event that might reduce overseas students, such as the outbreak of Covid.
It has also exaggerated pre-existing financial imbalances between universities, as the expansion of international students tends to be a more sustainable route for cities, such as London, that will appear more attractive to overseas students, especially the more wealthy ones.
Student numbers aside, many universities are struggling with a perfect storm of financial challenges, such as commitments to pensions they will struggle to meet, with a rise in employer National Insurance adding more pressure on staff costs. The likely outcome is job cuts. Meanwhile, research funding is also seen by some to be in crisis, with the loss of EU funding post-Brexit, government cuts to research funding, shrinking funding from industry, and a drop in overseas aid-funded research.
From the perspective of their wider estates, universities need to spend heavily on buildings that are old and require significant upgrading, if only to meet net zero targets. This adds further financial pressure, particularly on the less prestigious universities, which do not enjoy the same level of donations, endowments or major research grants attracted by the UK’s elite institutions.
It is therefore a relief that private investors are keen to invest, particularly in student accommodation.
And as indicative data from Barbour ABI shows, with the exception of the Covid years, the level of spend relating to the higher education sector has been strong and over the past two years even stronger, especially for student accommodation projects.
But for all the confusion, turmoil, and uncertainty, the consensus remains that the higher education sector is among the more promising sectors for the construction sector. Taking the education sector as a whole, the Construction Products Association expects solid growth of around 4 % to 5% this year and next, with spending within the university sector a major contributor. And a big part of this growth will be down to the higher education sector.
As indicative data from Barbour ABI shows, with the exception of the Covid-hit years, the level of construction spending in the higher education sector has been strong over the past decade. And, over the past two years, even stronger, especially for student accommodation projects.
It would seem, with a nod to Aristotle, that the roots of education may be bitter, but the fruit is sweet.