Last week I wrote about how Purpose Built Student Accommodation (PBSA) remains a top class investment despite a tumultuous 6 months. However, this does not guarantee that all schemes are successful. COVID-19 has had a notable impact on the real estate industry and PBSA is by no means sheltered from that. Here I look at the factors that need to be considered by investors, developers and lenders in weighing up the viability of a PBSA scheme.
The right location has never mattered more
PBSA has expanded rapidly since 2012. Whilst demand still outstrips supply at a national level, the reality is that much of the low hanging fruit that initially presented itself no longer exists and far greater scrutiny is required to identify viable locations.
Russell Group locations remain favourable and it is hard to see that changing. Student numbers are unlikely to be threatened due to the international reputation of this group of universities and their draw of international students, who commonly favour PBSA as their chosen dwellings. However, market data shows some Russell Group locations such as Newcastle have seen virtually no schemes built in the last 12 months due to current available supply. Cities such as Coventry are also likely to see a slowdown following huge growth in the previous 2 years.
Greater scrutiny of locations is therefore required. Where there is clear undersupply in an identified location, this still does not guarantee demand for PBSA. The student profile and sensitivity to cost will need to be considered as PBSA traditionally attracts premium pricing versus houses in multiple occupation (HMO). This typically coincides with the mix of international versus domestic student profile, given that international students are typically prepared to pay more for their accommodation.
COVID-19 has undoubtedly exposed the financial fragility of some universities. It has been suggested by the Institute for Fiscal Studies (IFS) that as many as 13 universities could become insolvent. For some universities outside of the top tier, it is fight or flight. Detailed market intelligence is required to identify universities that are diversifying and expanding as well as those that are in danger of closing. Plymouth is an example of this where planned expansion of the campus matched with undersupply of student accommodation, makes the location potentially inviting for future schemes.
The location of the site in relation to that of the university campus has always been important, but increasingly schemes within cycling or walking distance are viewed favourably, removing the need to use public transport during the pandemic. It must be highlighted though that this is very much a short term consideration. Access to local amenities remain of great importance as students don't like to be too far away from the action (whenever it is that the action returns of course).
Studios or clusters?
Traditionally, clusters rather than studios have been favourable to investors/developers/operators as it simply means more beds and therefore greater rental income. However, COVID-19 has somewhat changed the thinking behind this. As investors look to ensure that they provide a safe proposition to students, studios are preferable for upcoming schemes. There has certainly been a notable shift in shift in the big operators within the sector looking to acquire studio developments at a rapid pace currently in an effort to shift their exposure to clusters. The reduction in rental income from a less intense build has to be offset against the challenge of lower occupancy from students not wishing to live in clusters. It must also be noted that studios command a premium, especially given the high percentage of cluster schemes developed in recent years.
It will be interesting to see if this remains in the long term. There is the additional benefit that studios are easier to repurpose for the co-living market. One of the previous arguments against PBSA has been the difficulty in repurposing the site should the need arise. Current schemes that we have seen at Montpelier Private Finance included mixed site use with healthcare workers and care homes. Innovative schemes will most likely become the norm in the near future.
The need for certainty regarding construction
Investors and lenders are looking for increased certainty that a scheme will be built out in the most cost efficient way. The track record of contractors has always been an important consideration but now more than ever, it isn't the time to take a gamble.
As building sites paused back in March and social distancing rules remain in place, the productivity of traditional building sites has been heavily disrupted. By contrast modular construction has been able to weather the challenges of COVID-19 far more easily and even increase capacity. A factory setting for production means that work can be planned around the clock with the appropriate safety measures in place. As a result of completing the vast majority of the work off site the usual restrictions created by noise, access and the weather are dramatically reduced. Consequently there are great time savings along with cost savings. PBSA remains ideal for modular construction, and with a larger number of lenders slowly becoming agreeable to funding PBSA, this could be a popular solution for developers and investors. The increased certainty of delivery on time is naturally highly appealing.
Which operator to use?
For the majority of PBSA schemes an operator is employed to manage the running of the site and delivering maximum occupancy. There are established national operators such as Homes for Students, CRM and Student Roost who specialise in the management of PBSA. As the face of the scheme, the choice of operator has never been more important. With the national news presently dominated by the treatment of students, any mishandling by an operator could have a lasting and brand damaging effect.
An increasingly complex picture
At a national level the figures demonstrate that the medium to long term outlook for PBSA remains an extremely positive one. UCAS data shows numbers are growing year on year, including the ever important non-EU cohort. However, at a microeconomic level there are now more complexities to factor in than in previous years. In short, investors and developers are having to work harder to deliver successful PBSA schemes. Montpelier Private Finance has extensive knowledge of the PBSA sector and established relationships with specialised lenders. We assess each scheme in granular detail in order to procure the keenest overall pricing for our clients, whether that be development finance, developer exit or term funding. If you have a scheme you wish to discuss please get in touch here.
Please feel free to share this blog.