University Finances and PBSA: Navigating Challenges & Seizing Opportunity
The UK Purpose-Built Student Accommodation (PBSA) sector has long been underpinned by the strength and global appeal of British higher education, historically one of the best countries in the world for study and research. However, as 2025 unfolds, the financial pressures facing UK universities are mounting, owing to a number of factors, which will be explored in this post. Importantly, for investors, this raises key questions: How resilient is the higher education sector, how does this impact the PBSA market and what should be the target investment locations?
Avignon Capital has long recognised the complex interplay between university health and PBSA viability. On the face of it, certain markets can appear attractive due to supply-demand dynamics but, taking the covenant strength of those universities into consideration, the picture can appear quite different. Despite current headwinds, we believe that these challenges are part of a natural cycle of adjustment, and that opportunities remain strong – especially for those with the expertise to identify resilient institutions and growth locations.
The Pressures Facing UK Universities:
Reduction in International Students
Changes to UK visa rules introduced in January 2024—most notably the restriction on postgraduate students bringing dependants—have led to a measurable decline in international student numbers. According to UCAS and Home Office data, international postgraduate taught (PGT) applicants from Nigeria dropped by 71% and from India by 63% between January 2023 and January 2024. These groups have historically been among the highest contributors to university income, with international students paying an average of £22,000–£28,000 per year in tuition fees, compared to £9,250 for domestic undergraduates. In 2021–22 alone, international students contributed an estimated £41.9 billion to the UK economy, with significant financial benefits for both universities and local communities.
The sudden drop in enrolments has left some universities, especially those heavily reliant on PGT income, facing acute budgetary pressures. However, the sector is already adapting. Several institutions are shifting focus toward high-quality international undergraduates—whose application numbers have remained relatively stable—and broadening their recruitment efforts beyond traditionally dominant markets. Importantly, the UK still retains strong global appeal due to its leading institutions: the 2024 QS World University Rankings include four UK universities in the global top 10. While the near-term adjustment is significant, we expect this trend to stabilise as government policy evolves and demand from other growing regions, such as Southeast Asia and Latin America, helps rebalance the market.
Higher Operating Costs
UK universities are increasingly strained by inflationary pressures and rising operational costs. In 2023 alone, the Higher Education Statistics Agency (HESA) reported a 9.1% average increase in staff pay settlements, driven by both inflation and industrial action. Utility costs have surged as well, with many universities locking into energy contracts during the 2022 energy crisis—when wholesale prices peaked at nearly four times pre-2021 levels—resulting in disproportionately high ongoing costs for newer or recently expanded campuses.
These rising expenditures come at a time when fee-generated income has remained largely static. With domestic tuition fees capped at £9,250 since 2012 (equivalent to just £6,500 in 2024 terms after inflation), many institutions now face operating deficits. In 2022–23, more than 40% of UK universities reported in-year deficits, according to analysis by the Office for Students (OfS).
At the same time, the past three decades have seen significant academic portfolio expansion, as institutions sought to attract a broader student base through diversified course offerings. However, this strategy has, in some cases, led to financial overstretch. In response, universities are now actively streamlining operations—cutting non-core programmes and consolidating around their strongest academic disciplines. A notable example is Cardiff University’s closure of its Modern Languages department in 2023, despite its Russell Group status, signalling a strategic shift toward specialisation in high-demand, high-return subjects.
While these adjustments may result in short-term disruption and reputational risk, they represent a move toward leaner, more financially resilient institutions. For investors, this rationalisation strengthens the long-term fundamentals of the sector by concentrating academic resources and student demand around centres of excellence.
Debt-Fuelled Expansion
Over the past decade, many UK universities have embarked on substantial capital projects, often funded by third-party borrowing. These investments were intended to attract both domestic and international students with cutting-edge facilities, but the resulting debt burdens are now proving problematic for some institutions, especially those with declining enrolment or over-reliance on specific income streams.
As of March 2025, UK universities collectively hold approximately £9.5 billion in debt, much of it accumulated during periods of expansion. For example, Swansea University injected £450m of equity and debt into its new Bay Campus on the outskirts of the city, targeting technical and management courses and expecting to attract a new wave of students ; sadly, this has become a burden after foreign applications have struggled to keep up with expectations, which is a symbol of the wider financial problems facing the sector. The institution has since had to renegotiate its lending terms to avoid breaching its debt covenants.
On the converse, the University of Plymouth has invested into new facilities in the disciplines of Medicine and Computer Science, and which is now reaping the rewards of the commitment as applications to these courses have increased.
As a result of this different outcomes, investors in PBSA must scrutinise university balance sheets more closely. At Avignon, we see this as a differentiator: our in-house analytical capabilities allow us to dive into the financial health of universities in detail, identifying those with sound strategies and long-term sustainability.
Stagnant Tuition Fees
Domestic tuition fees have been frozen for over a decade at £9,250 per annum, while inflation has eroded their real value. This has placed further stress on university budgets, with some institutions operating at a loss for educating UK students. The recent increase of fees to £9,535 per annum – just 3.1% since 2012 – does not assuage the universities’ concerns around their net operating income.
While government intervention remains uncertain, some market recalibration is highly likely. Universities are seeking efficiency gains and exploring alternative revenue streams. For investors in PBSA, this underscores the importance of focusing on cities with strong, oversubscribed institutions where demand for accommodation remains resilient.
Demographics and Demand: A Structural Opportunity
Despite mounting financial pressures within the higher education sector, the macroeconomic outlook for Purpose-Built Student Accommodation (PBSA) remains fundamentally strong. The UK’s population of 18-year-olds is on a clear upward trajectory, projected to grow by 25% between 2020 and 2030, according to the Office for National Statistics (ONS). University participation rates also continue to rise, with over 37.5% of 18-year-olds in England entering higher education in 2023—the highest on record—reinforcing the role of university education as a key driver of social mobility and long-term earnings potential.
This demographic and behavioural shift is creating sustained demand for student accommodation, particularly high-quality, professionally managed PBSA assets. Over the past two years, average PBSA rents across key UK cities have risen by 6–8% annually, according to Knight Frank, outpacing both general rental growth and inflation in several markets. Students increasingly favour well-located, amenity-rich developments over traditional shared houses (HMOs), valuing security, private bathrooms, modern infrastructure, and social facilities.
At the same time, the viability of new PBSA developments has been constrained by sharp increases in construction costs—up 30% since 2020—as well as tighter planning environments and financing conditions. This supply-side pressure has driven student-to-bed ratios higher in many university cities, intensifying competition for spaces and supporting upward rental pressure. Even as universities consolidate and adapt to new financial realities, these structural trends are unlikely to reverse, presenting a favourable long-term backdrop for investors who can navigate the sector with precision.
Outlook: Rationalisation and Opportunity
Whilst there are headlines about financial distress, this period should be seen as a spell of rationalisation and opportunity, not decline. Just as the retail and office sectors have undergone structural shifts, universities are now doing the same – focusing more tightly on their areas of strength, whether in teaching, research, vocational training, or international engagement.
At Avignon Capital, we believe this environment favours investors who are selective and well-informed to take on operational risk within the PBSA sector. We do not view PBSA as a generic, one-size-fits-all item. Instead, we look deeply at local dynamics, institutional strategies, and long-term demographic trends. Our investment thesis is grounded in identifying locations where universities are resilient, student demand remains strong, occupancy of buildings is empirically proven, and the fundamentals support rental growth and long-term success.
In conclusion, while short-term volatility in higher education is real, the core value proposition of UK universities – and the PBSA assets that serve them – remains intact. Investors who can look beyond the noise and focus on the structural drivers will find ample opportunity in this evolving sector. At Avignon, we’re confident in our ability to navigate this landscape and continue to deliver excellent value in PBSA.
