The evolution of the student sector and changing levels of HMO supply

The future of the HMO market and the implications of the Renters’ Rights Act for PBSA

Market Trends

Investor focus remains concentrated on top-tier, higher-tariff university locations for stabilised opportunities, while developers are increasingly restricted to a handful of markets outside London where rental rates can support development viability. As a result, the divergence between top-tier / higher-tariff / Russell Group markets and secondary / tertiary locations continues to widen, a trend we have observed consistently over the past five years.

The UK-wide development outlook for PBSA presents significant challenges. Construction has declined from more than 35,000 beds across a broad spectrum of locations in 2019 to approximately half that number in 2025, with the geographical spread narrowing dramatically. A 30% year-on-year decline in planning applications from 2024 serves as a strong indicator that supply growth is not expected to rebound in the near term.

This decline in delivery raises important questions about market equilibrium and investment opportunities. While it is well documented that some university destinations have reached saturation point and would benefit from reduced supply (from an investor perspective, if not necessarily for students), the changing supply landscape has broader implications that warrant careful consideration.

Concrete changes rooted in government ideology and emerging policy frameworks are taking a hold, and we should start considering more carefully the numbers of beds we are losing in the same way we analyse planning pipelines, new delivery and possible saturation levels.

HMO Market Evolution and Institutional Investment

Brookfield’s recent entrance into the HMO sector represents a logical market progression rather than an unexpected development. Allsop has consistently highlighted the critical role of HMOs in the student accommodation ecosystem, comprising approximately 50% of total supply, with strong occupancy rates and consistent rental growth performance.

The primary challenge for institutional-type investment in this sector has traditionally centred on questions of scale and operational efficiency. However, several successful operational models have emerged and Brookfield’s acquisition of 1,300 beds along with an established operating platform in a single transaction demonstrates the viability of institutional investment in this space.

This acquisition represents a significant milestone in the market’s evolution, marking a turning point where the household name makes a first move into the sector. This development aligns with our projected trajectory for the HMO sector and carries with it implications for the PBSA market as well. While HMO and PBSA segments are intrinsically linked, the former has historically received less attention from institutional investors.

HMO Supply Outlook and Regulatory Environment

Despite Brookfield’s market entrance, we do not anticipate a surge in the growth of HMO supply. There will certainly be increased interest, intrigue and further investment in this sector. However, rather than supply expansion, we expect the opposite trend to emerge, with overall HMO bed numbers likely to decrease.

This counterintuitive outlook stems from local government attitudes toward HMOs. Local authorities generally view purpose-built student accommodation more favourably than student HMOs. Student occupation of HMOs reduces housing supply that would otherwise serve families or first-time buyers, while creating concentrated areas that are both difficult to manage and costly to administer, particularly given the absence of council tax revenue.

Furthermore, HMOs present regulatory challenges and the sub-sector continues to face perception issues regarding accommodation standards. As a consequence, local authorities (LAs) are increasingly exercising their devolved powers to constrain this sub-sector. Nearly all LAs have adopted Article 4 Direction, a planning regulation that removes permitted development rights, effectively controlling the conversion of domestic houses to HMOs. This regulatory approach has significantly slowed the exponential growth in HMO supply witnessed over the previous decade, bringing development to a virtual standstill in many towns and cities.

Some local authorities have implemented even stricter measures. In Nottingham, for example, the national minimum room size of 6.51 sq m has been superseded by a localised minimum requirement of 8 sq m. Other LAs are imposing more stringent standards for communal spaces in shared houses, such as mandating at least 2 sq m of communal space per occupant. These measures are effectively reducing available bedrooms, if not entire houses, from the supply pool as retrofitting to meet these emerging standards proves challenging for many property owners.

The introduction of the Renters’ Rights Act further impacts this landscape, with PBSA specifically carved out from certain provisions while HMOs remain subject to them (with the exception of Ground 4A). This regulatory divergence was largely anticipated by market observers.

Market Consolidation and Emerging Opportunities

Many traditional, local HMO landlords are now exiting the market. Considering that most of these landlords began building their portfolios approximately 30 years ago, many are now approaching retirement age without clear succession plans.

This transition creates significant opportunities for national aggregators, of which there are currently only 4 or 5 operating in the UK. The market available to these aggregators potentially encompasses as many as 800,000 beds at a time when local landlords are increasingly withdrawing from the sector.

The strategic implications of this shift are substantial. National aggregators can afford to be selective, focusing exclusively on properties in prime micro-locations. This rational approach results in the cherry-picking of properties from portfolios in the most concentrated, desirable areas. Consequently, peripheral student HMOs are becoming obsolete and we observe these properties being sold individually through local agents, reverting to domestic ownership or being acquired by investors underwriting Private Rented Sector (PRS) or social housing income.

When projected across the entire UK market, this trend will result in fewer HMO beds overall and the emergence of a transformed HMO market characterized by fewer landlords (increasingly professional entities with nationwide mandates), higher-quality accommodations and more concentrated prime micro-locations. This evolution will elevate product standards through institutional-grade management practices. A new operational paradigm for HMO letting and management will develop, led by sophisticated asset managers equipped to navigate and adapt to evolving legislation.

Given our expectation that HMOs will maintain their popularity, particularly among domestic students, the reduction in supply will likely drive rental and capital value growth in this sector.

Implications for the PBSA Sector

The transformation of the HMO landscape presents significant positive consequences for the PBSA sector. The relationship between these two accommodation types is entering a new phase that will reshape market dynamics.

Industry discussions have long referenced potential student migration from HMOs to PBSA, though this concept has historically lacked substantive evidence. The notion that domestic students might eventually prefer PBSA over HMOs has remained largely unproven and perhaps represented wishful thinking by PBSA stakeholders.

However, the current market evolution suggests that some domestic students may soon have limited alternatives as the HMO supply pool contracts. This represents a fundamental shift in market dynamics driven by necessity rather than preference.

PBSA operators could also steal a march because of a quirk in the Renters Right Act, forcing HMO landlords to push their lettings back. Currently, HMO landlords commence their lettings before PBSA however if these landlords want to be able to enforce Ground 4A for repossession, they are no longer able to sign up tenants more than 6 months’ before the tenancy start date. It remains to be seen whether PBSA operators react to steal an advantage and shift the letting landscape to commence marketing before HMOs.

When analysing city-level supply-demand dynamics, attention typically focuses on incoming supply (development pipeline), but it is equally important to consider accommodation being withdrawn from service. The retirement of off-pitch/ poorly located first-generation PBSA beds is becoming increasingly common, with some properties being mothballed while others transition to alternative uses.

And the reduction in HMO bed supply may provide the equilibrium adjustment that some markets require. Equally, certain markets may experience increased demand for PBSA development driven by this displacement of the existing tenant base from the HMO sector.

The long-anticipated flow of students from HMOs to PBSA appears to be materializing, albeit through market forces rather than changing preferences. This transition represents a significant inflection point in the student accommodation sector that will shape investment and development strategies in the coming years.

This article was written for the Sturents Annual Report 2025. The full report can be accessed here