Is Purpose Built Student Accommodation development still viable in London?

PBSA-related conferences in recent years have been riddled with murmurs that the proposed 35% affordable rent provision proposed by the Greater London Authority (GLA) could scupper the viability of developing PBSA in Greater London in the near future.

Not only will new schemes submitted to the planning pipeline be subject to impositions on affordable rent provision, but also the draft London plan suggests that each new development should be operated directly by one specific higher education institution or linked to one of the capitals many prestigious institutions.

This puts the universities in a position of power in terms of negotiating the nomination/lease terms and rents for any proposed scheme, thereby making viability even tougher for developers. 

The draft London Plan deduces the rate per week for reasonable and affordable student accommodation by looking at the maximum available maintenance loan available to students and determining that it would be reasonable for a student to spend 55% of their income on accommodation, which roughly equates to c. £164 per week assuming the maximum available maintenance loan for students.

The guidance states that this letting should be for a term of 38 weeks (or greater), which, for the large part leaves owners of PBSA able to lease to non-students during the university summer holidays.

The average build cost per unit for student accommodation in London has increased in the last three years from roughly £53,777 per bed in Q1 2015 to circa £63,338 per bed in Q1 2018 according to the BCIS, however an ‘agent’s view’ for speculative appraisals would rate this at closer to £80,000 per bed.

Brexit, the necessity to engage tier one contractors to attract institutional funding and a contractor/ tender imbalance, have driven construction costs upwards with no sign of slowing, particularly in London where sites are logistically ‘landlocked’ and the cost of labour is higher. 

CIL rates for student accommodation are relatively punitive in the majority of London boroughs, creating another hurdle to viability in Greater London, particularly in central London. Although the London plan acknowledges a need to develop c. 3,500 beds per annum throughout the Plan period, the designation of where these beds should be developed isn’t expressly stated in terms of annual targets.

Each individual borough, naturally, will want to be seen to be delivering housing stock for families and the less affluent, meaning that typically student housing features relatively low on the priority list for the majority of counsellors across London.

Similarly, as has always been the case, consenting student accommodation development can be an unpopular decision politically – students are often perceived to be disruptive, despite the considerable benefit they provide to the local economy, notwithstanding the moot point of student accommodation exemption from council tax.

Students also typically don’t vote in the borough in which they are studying/occupying PBSA, thereby further disincentivizing counsellors from consenting future development proposals.

So, are the above barriers insurmountable for PBSA developers? Arguably yes for the near future in Central London.

The ripple effect of development experienced in recent years is likely to continue, with well-connected/ periphery locations such as Stratford, Walthamstow and Wembley further establishing themselves as hubs for student accommodation.

With the maturing of these submarkets, we are likely to see these areas become increasingly desirable places to stay, once the areas have ‘bedded in’ and the F&B provision has adjusted to cater for the increasingly selective and dynamic millennial target market.

It is likely that markets such as Croydon, Woolwich, Canning Town and Royal Docks will become increasingly attractive locations for student development, since they provide impressive connections to Central London with less aggressive land costs.

The increased difficulty associated with developing stock in London, has led to yield compression in the capital and record values being achieved for consented land.

Investors have spotted that the pipeline is drying up, thereby securing rental growth going forward and insulating the market from any swift rebalancing to equilibrium from the acute undersupply that has historically been endemic in the market.

You might ask – what are the poor developers to do? The answer - become more creative. Co-Living space, although a fledgling market is likely to attract a high proportion of the target demographic for PBSA.

Similarly, the key market participants in the student space are increasingly becoming creative with how they maximise gross annual income through summer lettings, often to non-students under a ‘hotel’ style nightly rent model.

There are in fact specialist companies emerging, such as Resotel, to provide this service, where a dedicated student website will provide the term time lettings, and an entirely separate website will provide a ‘hotel-style’ booking system throughout the summer.

The majority of owners of London-led portfolios in the sector are creating equivalent summer platforms to harness the potential of this capability, and this space is likely to become progressively more sophisticated and increasingly competitive, just as we have seen the advent of ‘dynamic pricing’ in the student sector go from being rare to commonplace. 

London remains at the forefront of investors’ minds in the PBSA sector due to the exceptional fundamentals, and although viability is becoming increasingly challenging, opportunities do still arise and the well-informed developers in the sector are poised to take advantage of these when they present themselves.

John Holley is an Associate in the Knight Frank Student Property Agency Team.