How To Combat The Top Financial Challenges Facing Student Accommodation Developers

In a challenging market, purpose-built student accommodation is proving resilient. Across real estate, investment volumes have been low in 2023, but investor sentiment in PBSA is still strong. As of July, 41% of investors considered PBSA to be the most resilient sector, up from 30% in January. 

However, a developer keen to enter the PBSA sector needs to be aware of certain challenges. This is the message from Jason Appel, property and construction partner and head of accounts at chartered accountancy and tax consultancy firm BKL. With the right planning, these hurdles shouldn’t impact returns.

Bisnow spoke to Appel about the key challenges facing PBSA from a finance point of view and how to combat them.

Allow For Delays And Uncertainty

In PBSA, timing is important. Developers need to complete projects in time for an August or September deadline for students to move in at the start of the term. Missing an intake could have a significant impact, both in terms of lost income for up to a year and additional interest on development finance. 

However, there are many reasons a project could get delayed, Appel said. The measures introduced by the Building Safety Act 2022 cost developers additional time during the planning process, and there is still uncertainty about what changes need to be made to comply. 

“Everything is taking much longer than developers would like it to,” he said. “Another reason for this is that several large contractors are going into administration. This leaves the developer in a position where they can’t meet terms in their finance contracts. We’ve even had clients taking on the role of contractor themselves, as they haven’t been able to secure a new contractor on favourable terms.”

The best way to combat delays is to factor an element of flexibility into project management from the start, Appel said. By communicating transparently with investors and debt providers, the impact of delays can be mitigated.

Expect Cost Increases

The rise in interest rates has impacted all elements of the real estate market. On top of this, material and labour costs remain high post-Brexit. All this is eating into profit margins.

However, values in PBSA are holding, unlike in other real estate sectors, which means that developers are keen to persevere, Appel said. PBSA is still a very desirable asset for overseas and institutional investors. 

“Rising costs make it harder to create a plan to get the scheme to market, as it reduces developers’ confidence in what their position will be when they complete the build,” he said. “The answer is to work with financial advisers from the start of the project who can develop a robust plan.”

Determine The Right Exit Plan

Appel said that how his team advises clients on the right funding structure for a project depends on the end goal. Taxes vary depending on the purpose of the project. 

“It helps if a developer knows what their exit strategy is from the beginning,” he said. “Do they want to build and hold the asset or build and sell? Some want flexibility to do either, which is where we need to map out the best possible financial scenario. Financial structures can get complex.”

Real estate development touches almost every type of tax, from value-added tax to stamp duty to whether there is tax relief on professional fees, Appel said. 

Take stamp duty land tax. Traditionally, a hall of residence is treated as a nonresidential property with an SDLT rate of about 5%. The cluster flat-type of student accommodation, which is increasingly popular, is treated as residential and commands a much lower SDLT rate. There are similar complications with capital gains tax in terms of the layout of the property. 

All this has a bearing on the final value. If SDLT is low, an investor may be willing to pay more for a PBSA building than a normal residential building that generates the same rents. 

“Another area is VAT,” Appel said. “The amount of VAT relief depends on whether a developer wants to immediately sell the property or lease it for a couple of years to boost the value by proving they can maximise occupancy. That’s where we come in, to advise them on the best structure for their desired outcome.”

Keep ESG In Mind

When it comes to financing, a developer needs to demonstrate that it has considered all requirements relating to sustainability, including how to meet energy performance certificate requirements, Appel said. Their plan needs to extend the full life of a loan. 

“We’re starting to see property companies take on existing PBSA properties with the aim of refitting,” he said. “They often need significant investment to bring them up to energy-efficiency standards. Given the number of existing properties, this is a sizable opportunity, but the finances need to be structured effectively to deliver the returns on that investment.”

Students also increasingly want to live in sustainable homes. If developers plan early, they can factor in systems that help students live as sustainably as possible, such as effective energy controls or waste management systems, Appel said. Many of these systems will reduce operating costs, which will have a knock-on effect on property values. 

Don’t Forget The Impact Of Government

Student numbers in the UK are rising. By 2030, the number of higher education applicants is projected to have risen by 30%. Overseas students have also returned, now accounting for a fifth of UK universities’ income.

This increase in student numbers is putting pressure on the PBSA sector to deliver more homes. However, investors are aware that government legislation or an unforeseen disaster such as the pandemic could impact the sector, Appel said.

“Many larger investors are researching where overseas students are coming from to ascertain whether the trend of rising numbers of foreign students will continue,” he said. “If they are going to invest in PBSA, they want to be certain of the market. And while the number of UK students is forecast to increase, future government policy could change that. Student loans are far more expensive than a few years ago and the cost of living crisis is having an impact.”

While there is always a risk of unforeseen challenges, BKL has many clients that are confident in the strength of PBSA, Appel said. As investment and development pick up in 2024, those with the right financial structures will be in a good place.

BKL will be holding a webinar on PBSA on 30 November. 

This article was produced in collaboration between BKL and Studio B. Bisnow news staff was not involved in the production of this content.

Studio B is Bisnow’s in-house content and design studio. To learn more about how Studio B can help your team, reach out to [email protected].