Whilst the focus for the purpose built student accommodation (PBSA) sector has very much been about the impact of COVID-19 in the last 10 months, for investors and developers considering undertaking schemes in London there is an additional challenge on the horizon in the form the Mayor of London's new London Plan. Here we look at what this might mean for future PBSA schemes in the capital and the likelihood of the changes being implemented.
What is the new London Plan?
Since the formation of the Greater London Authority (GLA) in 1999, the Mayor of London has gained greater powers over Spacial Development Strategy (SDS) including housing and planning. The new London Plan seeks to replace the existing 2015 plan with work beginning on formulating it back in 2016 and sets out the SDS until 2041 (although you would expect amendments along the way). The overall objectives are:
Promoting economic development and wealth creation in Greater London
Promoting social development in Greater London
Promoting the improvement of the environment in Greater London
The plan is certainly comprehensive. The current version is more than 600 pages long containing more that 100 policies across 10 key policy areas. Within this enormous document sits policy H15 regarding purpose built student accommodation. Point 3 of the policy states:
"The majority of the bedrooms in the development including all of the affordable student accommodation bedrooms are secured through a nomination agreement for occupation by students of one or more higher education provider."
This is a notable change and essentially looks to clip the wings of PBSA providers by restricting the means to which tenants can be procured.
What are Nomination Agreements and Direct Lets?
There are two methods by which PBSA providers rent out to students; Nomination Agreements and Direct Lets.
Nomination Agreements are contracts between the PBSA provider and a university where there is a commitment from the university to provide a minimum number of students each year for a fixed period, typically 5 years (although agreements can be for as many as 25 years). The university can expect some decision rights of areas such operational matters and rent setting. The benefit to the PBSA provider is a guaranteed income for a set period.
Direct Let schemes are, as the name would suggest, where the PBSA provider lets directly to students. The provider has to market and manage the accommodation themselves, often through an appointed operator. Whilst there is an increased risk of lower occupancy levels, providers can generally achieve higher yields than through Nomination Agreements and retain greater control of how the asset is managed.
For context, Nomination Agreements are not particularly common place. According to Cushman and Wakefield's 2019/20 UK Student Accommodation Report; only 26% of privately owned PBSA had Nomination Agreements in place.
What will be the impact of the new London Plan on PBSA?
There is an undeniable demand for PBSA in London. The new London Plan acknowledges this by identifying the need for 3,500 beds a year for the life of the plan. Yet by setting in stone the need for Nomination Agreements to accompany any new PBSA developments, the opportunity to meet such demand would be seriously prohibited.
The demand for PBSA beds does not guarantee that universities will be motivated to enter into long term financial agreements with PBSA providers. Whilst PBSA sites are typically located to serve a particular university, London is somewhat unique. Excellent transport links and the density of universities across a relatively small area means that accommodation does not typically serve one university.
The current economic climate, with the impact of COVID-19 and the remaining uncertainty of Brexit, only further increases the likelihood that universities will be unwilling to open up to an increased number of Nomination Agreements. The likely outcome is that there would be an almost complete cessation of future PBSA schemes in London, pushing students towards the HMO market as a result of undersupply.
But will the new London Plan be adopted?
The road to the plan being adopted has certainly not been straight forward to the Mayor of London; Sadiq Khan. It had been initially intended that the plan would be in place by July 2020, but a timeline of events has thus far prevented its adoption:
23rd March 2020 - The Housing Secretary, Robert Jenrick invoked his right to block the plan on the grounds that it was in contravention to national planning policy. In a scathing letter to the Mayor of London he highlighted 11 directions that need actioning before approval could be considered.
9th December 2020 - The Mayor of London responded stating that he intended to publish the plan before Christmas, despite having not heard from the Housing Minister regarding proposed amendments to the plan.
10th December - The Housing Secretary responded with two further directions, albeit in a letter with more positive tones than his letter in March.
21st December 2020 - The Mayor of London responded in writing and issued his draft plan for the Housing Minister's approval. Policy H15 regarding PBSA remains in the draft.
The Housing Secretary has 6 weeks to respond to the Mayor of London's revised draft. In following events to date, it can be expected that he will take the full 6 weeks to respond. Whilst the revised plan makes a number of concessions it does not fully adopt the directions that the Housing Secretary has instructed. It is likely that there will be further instructions before the plan can be adopted. This will put the likelihood of the full adoption of the plan into serious question prior to the delayed Mayoral elections due to be held in May 2021. Following the adoption of a plan, there would need to be at least a 2 month period for legal ratification.
In addition there remains the question mark over how the national planning system will look. The public consultation was concluded on 29th October 2020 following the governments 'Planning for the Future' white paper, with the defined government proposals expected at some point this year. The new London Plan will need to be compatible with the future national policy.
Whilst there has been some apparent movement towards the adoption of the new London Plan in the last month, there remains significant doubts as to whether it will eventually become reality. If this is the case, it will be nothing to do with ill thought out policy H15 regarding PBSA, but no doubt developers and investors will breathe a huge sigh of relief.
How can Montpelier Private Finance help?
Montpelier Private Finance has extensive knowledge of the PBSA sector and established relationships with specialised lenders in order to procure the keenest overall pricing for our clients, whether that be development finance, and developer exit or term funding. If you have a scheme you wish to discuss please get in touch here.