2018: Trends in the purpose built student accommodation sector - Generating opportunities in a challenging and competitive market - Taylor Wessing
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2018: Trends in the purpose built student accommodation sector Generating opportunities in a challenging and competitive market
Contents
1 Introduction
2 What’s going on in the market?
4 Reputation and demand
6 The chase for viable prime development sites continues
10 Rising construction costs – modular construction:
getting the right fit
14 HMO licensing reform – disappointing news for PBSA
providers
18 Taxing times ahead for offshore investors, but some
positive news for developers
20 Staying ahead of the game
22 Taylor Wessing’s key predictions for 2018
24 Key contacts
Introduction
2017 was another strong year for the UK purpose built student
accommodation (PBSA) sector, with the cumulative value of investment
totalling £4.07bn, close to £1bn higher than the previous year and climbing
back towards the record level seen in 2015.
Knight Frank’s student property team estimates that the value of the
UK PBSA sector will hit £50bn by 2019.
In this year’s trends report, the Taylor Wessing student accommodation team
consider the continuing attractiveness of the sector to global investors. We
evaluate some of the challenges faced by different stakeholders that may
impact on decision making processes and further growth and look at where
the future opportunities might be for developers, investors and operators.
11
What’s going on in the
market?
The cumulative value of investment in Two significant portfolio deals that
2017 was £4.07bn, close to £1bn higher completed in December 2017
than the previous year and climbing (iQ Student Accommodation’s
back towards the record level seen acquisition of the Regent Portfolio
in 2015. This was underpinned by the for £869m and Arlington Property
investment strategies of some of the Investors’ acquisition of the Study Inn
key players to consolidate and increase Portfolio for £135m) brought to a close
market share. another resilient year for the sector.
Other significant transactions in 2017
2014 £1.5bn included acquisitions by Brookfield,
CPPIB, Unite, GCP Capital, Europa &
2015 £5.1bn Generation Estates and Tristan Capital.
2016 £3.1bn Q1 2018 showed signs of a further
year of consolidation in the sector, with
2017 £4.07bn
Brookfield completing its acquisition
2018* £4.5bn of the Enigma Portfolio for £520m
*Projected and total investment in the quarter
estimated to have exceeded £1bn. In
Source: Knight Frank (May 2018) June 2018, Property Week reported
that Round Hill is understood to
be in exclusive talks with Watkin
Jones to forward fund seven PBSA
developments with a GDV of £250m.
2Two further large portfolios of (the supply/demand dynamic, stability
existing stock are also being marketed and resilience to economic downturns,
for sale. A number of new joint ventures relatively low risk of tenant default
and funds have been announced and the reputation of UK academic
and new global investors are actively institutions, amongst others) remain
seeking out opportunities to take a compelling and will continue to drive
stake in the sector. All signs point to future growth of the sector.
another strong year.
We anticipate that there will be fewer
Knight Frank’s Student Property Team portfolios changing hands in 2018 but
estimates that the cumulative value of a steady stream of high value single
investment transactions in 2018 will be asset deals as market leaders continue
around £4.5bn and that the value of the to consolidate their portfolios and
UK PBSA sector will hit £50bn by 2019. grow their brands. We also envisage
further acquisitions of equity stakes in
In our view, the fundamental established investment and operating
characteristics and drivers that have platforms and greater collaboration with
attracted increasing global investment universities to revitalise some of the
into the asset class over the last 5 years more tired stock.
32
Reputation and demand
Whilst we cannot ignore the press 2018 UCAS cycle at the 24 March deadline –
coverage on the potentially adverse difference between cycle and 2017 cycle
impact that Brexit will have on the 10
quality and demand for UK higher 5
education, is that anything more than -0
political rhetoric? We have yet to see -5
any real evidence of a downturn in -10
per cent
global demand. -15
-20
The major UK universities continue to -25
score well in the reputation rankings -30
(the current list of the best universities -35
in the world published by Times Higher -40
Education is led by two UK universities
for the first time) and the latest UCAS 2009 2011 2013 2015 2017
figures indicate that demand for places UK
EU (excluding UK)
Not EU
All domiciles
remains strong.
Source: UCAS Analysis and Insights
(5 April 2018)
World University Rankings 2018 (UK entrants)
1 University of Oxford 36 King’s College London
2 University of Cambridge =54 University of Manchester
8 Imperial College London 76 University of Bristol
16 UCL =80 University of Glasgow
=25 London School of Economics and 91 University of Warwick
Political Science
97 Durham University
=27 University of Edinburgh
Source: The Times Higher Education World
University Rankings 2018
45
3
The chase for viable
prime development sites
continues
Against that backdrop of buoyant Mayor in his Annual Monitoring Report
investment appetite and strong (AMR). For the 2017-18 academic year
demand, developers continue to seek the annual rental cost for affordable
out opportunities to bring forward new PBSA must not exceed £6,051 which
schemes in the right locations. However, equates to a weekly rent of £159 for a
planning policy, high community 38-week contract. The next AMR will be
infrastructure levies, rising construction published in July 2018.
costs and the impact of competing land
uses on the availability of land (amongst However, the 2016 Guidance specifically
other constraints on the development excludes from the requirement PBSA
pipeline) have created a challenging developments where the provider has
environment to navigate. a nominations agreement with one
or more academic institutions that
The spotlight on affordability continues specifies that the accommodation will
to present a challenge to the be occupied by students of the relevant
viability of new PBSA schemes. The institutions and where the continuance
Supplementary Planning Guidance of the agreements for as long as the
issued by the Mayor of London in March local authority considers appropriate
2016 requires new development of is secured by a planning condition or
PBSA to include an element of provision agreement.
that is affordable for students. We
considered the 2016 Guidance in detail
in our 2017 Trends Report. It requires
the element of affordable PBSA to
be the “maximum reasonable amount
subject to viability” and the annual
rental cost for the affordable PBSA
not to exceed a figure published by the
6The draft new London Plan issued Further, the draft Policy H17 requires
by the Mayor in December 2017 35% of student bedrooms in all new
and setting out a policy takes the PBSA to be affordable. If that threshold
affordability requirements a step is not met, a scheme will be considered
further. Draft Policy H17 (see page 8) under the viability tested route in
requires that all PBSA “must either be line with part E of Policy H6 and the
operated directly by a higher education Mayor’s Affordable Housing and Viability
institution or the development must SPG. This application of the affordable
have an undertaking in place from housing threshold to all PBSA marks a
initial occupation, to provide housing shift in approach to the current London
for students at one or more specified Plan which only seeks affordable
higher education institutions, for as long housing where there is no nominations
as the development is used for student agreement in place.
accommodation”.
A majority of the bedrooms in the
development must be covered by such
an undertaking. If the PBSA is not
secured for use by students and for
occupation by one or more specified
higher education institutions, it will not
be considered PBSA or meeting a need
for PBSA and the development proposal
will be considered large-scale purpose-
built shared living and assessed by the
requirements of Policy H18.
7H17 In its response to the consultation on
the draft new London Plan, the British
A. Boroughs should seek to ensure that
local and strategic need for purpose-built Property Federation (BPF) has raised
student accommodation is addressed, a number of concerns and suggestions
provided that: for further review. These include:
1. at the neighbourhood level, the
development contributes to a mixed and ff a concern that requiring a link to
inclusive neighbourhood a higher education institution will
2. the use of the accommodation is limit access to PBSA for students
secured for students of smaller institutions and put
3. the accommodation is secured for more pressure on the conventional
occupation by members of one or more residential housing stock
specified higher education institutions
ff the lack of clarity in the draft policy
4. at least 35 per cent of the as to what constitutes a nominations
accommodation is secured as affordable
agreement, the length of term
student accommodation as defined
through the London Plan and associated required and the percentage of
guidance beds within a scheme that would
5. the accommodation provides adequate constitute an “undertaking” – higher
functional living space and layout. education institutions may be
B. Boroughs, student accommodation reluctant to contractually commit
providers and higher education institutions early in the design process prior to
are encouraged to develop student planning approval being given and
accommodation in locations well- will also have concerns at how the
connected to local services by walking, requirements can be reconciled with
cycling and public transport, but away accounting treatment considerations
from existing concentrations in central
London as part of mixed-use regeneration
and redevelopment schemes.
Source: The London Plan: The Spatial
Development Strategy for Greater London –
Draft for Public Consultation (December 2017)
8ff concerns that the 35% affordability The consultation closed on 2 March
requirement will further constrain 2018. We await the outcome, but
the development of private PBSA do not expect to see any significant
in London which will apply further amendments to draft Policy H17.
pressure on the capital’s wider
housing stock Further, we anticipate that local
planning authorities across the UK will
ff querying the justification for applying follow suit and adopt similar policies to
the affordable housing threshold to address the affordability issue. This will
all PBSA, even where nominations place a further strain on the financial
have been agreed – the BPF believes viability of potential new PBSA projects
that schemes in London which can and developers will be working hard to
demonstrate that they directly link try to counterbalance the impact by
with a higher education provider interrogating other development costs,
should have the 35% affordability including the costs of construction.
requirement removed and that where
100% of the rooms in the student
development meet the affordability
criteria, there should be no need
for a nominations agreement with a
university.
The BPF’s concern about the VAT
consequences of requiring a link to
specified higher education institutions
should be alleviated by the outcome of
the Summit Electrical case which we
consider in the tax update on page 18.
94
Rising construction costs
– modular construction:
getting the right fit
The costs of construction continued to structure, up to full apartments, where
rise throughout 2017, with both material only the central core is constructed
and labour costs on the increase. on site and the rest of the building is
AECOM’s cost indices, published in constructed off-site.
Building Magazine on 19 March 2018,
state that between Q4 2016 and Q4 The benefits of modular construction
2017, the building cost index rose 4.2% mainly derive from cost savings – whilst
and the mechanical cost index rose modular construction is often more
4%. Such increases are forecast to expensive than standard construction,
continue into 2018 with increases in the shortened construction period on
input costs offsetting any predicted site more than compensates. Work
deflationary effects. As a consequence, on the ground can be carried out in
many developers, in both student parallel with the construction of the
accommodation and other sectors, modules and, because the modules are
are looking at ways to mitigate the constructed in a factory setting, delays
effects of the current market and to due to adverse weather are mitigated.
protect margins, and one of the ways In addition, less labour is required on
in which developers are seeking to site as the majority of the work can
do this is through the use of modular be carried out at the factory utilising
construction. local labour. There does need to be a
critical mass of construction to make
Modular construction (also referred modular construction financially viable
to as ‘off-site construction’) can mean given that it is, effectively, a production
anything from small prefabricated line that needs to be set up specific
elements such as bathroom ‘pods’ or to a particular building or a number
façade systems constructed in a factory of buildings to the same specification
away from the construction site, and (150+ rooms has been suggested as a
delivered to site fully fitted out and tiled guide).
ready to be incorporated into the on-site
10Whilst historically ‘pre-fabs’ have had Interface – there needs to be
a bad reputation as being lightweight, clear risk allocation between
temporary looking, not durable, the structural engineer
depreciating in value and with a high responsible for designing the frame
lifecycle cost exposure, quality is or core, the mechanical and electrical
improving and with a maturing supply engineer responsible for designing the
chain there are now a number of cabling and plumbing and the design of
products on the market which have the modules, as there is less scope for
changed these perceptions. correcting ‘design clashes’ than when
traditional construction methods are
However, there are still a number of used.
issues specific to modular construction
that need to be considered by developers Fixing design – modular
and funders, and we have summarised construction requires both the
some of the key legal points below. design of the overall project
and the detailed design to be fixed at
Quality – quality control an early stage, so that the modules can
is potentially more difficult go into production. Once that process
than traditional construction is underway design changes are very
as manufacturing issues are difficult difficult and expensive to implement.
to rectify once the module is on site.
Developers and their funders need
to have a presence at the place of
construction to be able to monitor and
inspect the modules and identify any
issues before they leave the factory.
Rights of access and inspection to the
factory will be required along with a
right to be present for all tests carried
out on the modules.
11Payment – significant advance Insolvency Risk – in the
payments are usually required event of insolvency of the
to be made to the module module supplier, it will be
supplier, due to the bespoke nature of difficult to find another supplier that can
the modules. Developers and funders continue to deliver modules to the same
therefore need to ensure that there is specification, and it will have a huge
sufficient security over the modules impact on programme, certainly more
and the components within them at so than finding a contractor to continue
all stages of manufacture. This can be to build out a traditional construction
achieved (to some extent) by third project. Therefore it is critical to
party bonds and vesting agreements. understand the financial covenant
We have also seen funders take a strength of the modular supplier and
charge over the factory and plant where obtain appropriate performance security
the modules are being constructed, but through bonds or guarantees or to look
this may not be possible in many cases. to cover off the risk through insurance.
Title – there are two title Transit Risk/Insurance –
issues which require specific the risk of damage to the
consideration when it comes to modules in transit needs to
modular construction. One is ensuring be considered and the risk allocated
that the developer or funder has title appropriately, backed by suitable
over the constructed modules before insurances.
their delivery to site. The second issue
is that often a developer will provide Modular construction is clearly going
certain elements of the modules to to play a key part in the future of
the module supplier for the supplier to construction and has the potential to
incorporate into the module, such as revolutionise the construction market
tiles, or white goods, so any contract but developers and funders must ensure
needs to deal with title in the developer’s that these key risk areas are addressed
goods to ensure that title is retained. if they are to reap the benefits.
1213
5
HMO licensing reform –
disappointing news for
PBSA providers
The approach to HMO licensing of into the mandatory licensing regime,
student accommodation properties although most of these properties will
varies greatly between different local not be PBSA schemes as purpose-built
authorities. This trend looks set to self-contained flats will be exempt.
continue, with the recent government
response to a consultation proposing However, as many PBSA providers
to extend the scope of mandatory will have experienced first-hand, it is
HMO licensing, without taking forward not mandatory licensing that tends to
proposed licensing discounts for PBSA. catch PBSA schemes but additional or
Indeed, the Licensing of House in selective licensing introduced by the
Multiple Occupation (Prescribed relevant local authority.
Description) (England) Order 2018 (SI
Additional licensing can be used to
2018/221) (“LHMO 2018”) brings into
cover HMOs which are not subject to
force some of the changes promised
mandatory licensing (e.g. HMOs that are
by the government as a result of its
occupied by less than five people) while
consultation.
selective licensing can cover properties
Most significantly, the extension of which are not HMOs. For example,
mandatory licensing in the LHMO 2018 some local authorities have introduced
will mean that most HMOs that are selective licensing regimes covering
occupied by five or more people who all privately rented properties within a
do not form a single household will specified area, including individual flats
require an HMO licence,regardless of the and studios within PBSA schemes.
number of storeys. Mandatory licensing
currently only applies to HMOs of three
or more storeys. This change is expected
to bring another 160,000 properties
14The existing licensing exemption for enforcement of licence conditions for
student accommodation schemes all purpose built HMOs. This decision
that are occupied by full time students will be disappointing for PBSA providers
and managed by an educational who are already accredited through
institution pursuant to an approved an approved code and may well see
code will continue to apply following HMO licensing fees as a duplication of
implementation of the reforms. But costs and a means of subsidising local
such exemption will not be extended to authority enforcement in relation to
PBSA owned and managed by private problem properties.
landlords who have similarly adopted an
approved code of practice. The extension to the mandatory
licensing regime in the LHMO 2018,
The government did recognise in its together with the government’s other
consultation paper that such licensing reforms (such as obliging the Secretary
of PBSA schemes was not necessarily of State to review these provisions
appropriate or proportionate, on the at least every 5 years) will come into
basis that PBSA tends to be well- force on 1 October 2018. Transitional
managed and requires little local measures are included for HMOs that
authority intervention. Accordingly, are already licensed under the selective
“significant discounts” on HMO licensing licensing provisions, but which will be
fees for PBSA were proposed. This subject to the new regime from when
proposal was not taken forward in the LHMO comes into force.
government’s response, nor in the
LHMO 2018, amid concerns that such
a discount may be seen as a barrier to
local authorities being proactive in their
15Moreover, although currently in requiring the licence holder to ensure
draft form, the Licensing of Houses that minimum floor areas are met
in Multiple Occupation (Mandatory and maximum occupancy numbers
Conditions of Licences) (England) are not exceeded in relation to rooms
Regulations 2018 stipulates certain used as sleeping accommodation. This
mandatory conditions to be included in may have an impact on the design of
HMO licences granted in England. The PBSA schemes that are caught by
draft regulations include requirements the mandatory or additional licensing
for HMO licences to impose conditions regimes.
1617
6
Taxing times ahead for
offshore investors, but
some positive news for
developers
Changes announced at the Autumn 2015 include a specific carve out for
Budget 2017 to the scope of capital purpose built student accommodation
gains tax will affect many offshore based on the number of bedrooms in the
property owners, including those in building and the number of days they are
the student accommodation sector. occupied by students. It is not expected
It was announced that, from April that there will be any similar carve out
2019, capital gains tax will be extended for student accommodation with these
further to non-residents investing in UK rules – the stated aim is to establish a
commercial property. However, there level playing field for taxation of non-
will be an automatic “rebasing” to April residents and residents alike investing in
2019, which effectively means that gains UK property.
accruing prior to April 2019 will not be
subject to tax for non-residents. Also relevant for the student
accommodation sector were the
The new rules will also apply to in-direct decisions of the First-tier Tribunal and
disposals of UK commercial property Upper Tribunal in Summit Electrical
(ie exits via the sale of shares or Installations Limited v HMRC. This may
comparable interests). result in cash flow savings for many
student accommodation contractors
This will be a major change in the who may find it more likely that they will
nature of taxation for non-residents be able to avoid paying VAT on sub-
and will affect owners of student contractor’s charges.
accommodation that hold assets through
offshore vehicles. The non-resident
capital gains tax rules on UK residential
property that were introduced in April
18The Upper Tribunal decision confirmed As set out earlier in this report, this
that a planning permission condition decision should also offer some
stating that a building has to be used comfort to the concerns around the
for students attending a particular VAT risk with the draft new London
university does not preclude a building Plan and requirement for nominations
from being ‘designed as a dwelling’ agreements.
for VAT purposes. The restriction on
zero-rating by reference to separate use The First-tier tribunal also determined
was concerned with situations where a that if a relevant residential purpose
property was in effect legally dependent certificate has been issued by the end
on another property, so that it was not user to a contractor (which only allows
possible to dispose of the first property a contractor to zero rate supplies) this
separately from the second. does not prevent a sub-contractor
from being able to treat the building
The restriction in this case was based as designed as a dwelling and hence
on specified universities at which zero rating its supplies on that basis.
the occupants studied, rather than However, unfortunately this point was
particular properties. This was not a not confirmed in the Upper Tribunal
prohibition on separate use and the (because HMRC did not appeal this
building could be a dwelling. Where a point). Therefore, this aspect of the
building is designed as a dwelling (or decision should be met with some
a number of dwellings) this broadly caution as HMRC’s guidance in the area
allows sub-contractors to zero rate their has not yet changed.
supplies for VAT purposes.
197
Staying ahead of the
game
Competition for the development pipeline Forward funding perhaps requires a
has become fierce and in order to secure greater reliance on the data providers in
prime product early, we are now seeing the industry in analysing local markets
an increased “willingness” of investors to and getting the pricing models right.
engage in forward funding arrangements
with developers, often prior to planning These structures inevitably present
consent being obtained. Perhaps this their own legal nuances that need to be
is more a tacit acceptance by some addressed in negotiating the right deal
investors that early commitment to and at the heads of terms stage.
funding of schemes is a necessity to stay
ahead of the game.
A typical forward funding structure
MARKET VALUE
OF LAND
Lease (25 years, rent
Conditional linked to net income)
LANDOWNER / Sale FUND
DEVELOPER Contract
OPERATING
SPV
DEVELOPER’S
PROPERTY Forward PROFIT Assured
funding shorthold
agreement tenancy
agreements
OCCUPIERS
DEVELOPER
PROFESSIONAL BUILDING
TEAM CONRACTOR
SUB-CONTRACTORS
2021
8
Taylor Wessing’s key
predictions for 2018
ff Growth of hybrid co-living ff Increased collaboration with
schemes – reacting to the Universities – with limited
constraints of the planning regime, availability of land for new PBSA
we envisage seeing more new and highly competitive land uses, we
development schemes offering a mix expect to see greater teaming up
of PBSA and co-living targeting the between developers, operators and
graduate market. Universities to upgrade or rebuild
ff Launch of new operating platforms existing stock.
and brands – we expect to see the
launch of new operating platforms
and existing operators increasing
their capex on brand differentiation
and focusing on the legal protection
of their brands.
22ff A highly competitive market with ff Innovative operating – we expect
potential new entrants to the operators to look at more innovative
sector – we expect to see an pricing models and opportunities
increase in the number and scale to maximise income outside of
of acquisitions of equity stakes in academic semesters.
established investment and operating ff Beyond the UK – established
platforms and intense competition for investors in PBSA in the UK looking
the development pipeline leading to to other European and global
more speculative forward funding of opportunities.
prime new development schemes.
ff A focus on innovation in the
delivery of new PBSA – as well
as an increase in adoption of
modular construction, we envisage
an increased uptake of proptech
solutions to improve efficiencies in
the delivery of PBSA.
239
Key contacts
Paul Leamy (Real Estate) Natasha Cooper (Corporate)
Partner, London Senior Associate, London
+44 20 7300 4656 +44 20 7300 4871
p.leamy@taylorwessing.com n.cooper@taylorwessing.com
Alistair Watson (Planning and Environment) Harriet Revington (Tax)
Partner, London Senior Associate, London
+44 20 7300 4240 +44 20 7300 7109
a.watson@taylorwessing.com h.revington@taylorwessing.com
Heather Buttle (Banking and Finance) Charlotte Chambers (Corporate)
Partner, London Senior Associate, London
+44 20 7300 4141 +44 20 7300 4201
h.buttle@taylorwessing.com c.chambers@taylorwessing.com
Robert Young (Tax) Daniel Williams (Banking and Finance)
Partner, London Associate London
+44 20 7300 4201 +44 20 7300 4739
r.young@taylorwessing.com dr.williams@taylorwessing.com
Jill Hamilton (Construction)
Senior Counsel, London
+44 20 7300 4868
j.hamilton@taylorwessing.com
We would welcome the opportunity
to explore any of the issues
Chris Komodromou (Real Estate) identified in this report with you in
Senior Associate, London
+44 20 7300 4269 greater detail.
c.komodromou@taylorwessing.com
Hanna Ross (Real Estate)
Senior Associate, London
+44 20 7300 7154
h.ross@taylorwessing.com
Emma Tait (Planning and Environment)
Senior Associate, London
+44 20 7300 4952
e.tait@taylorwessing.com
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