Roland Smyth charts the evolution of student accommodation into a new asset class
Readers over the age of 40 will probably recall student accommodation as a somewhat grim experience – either halls of residence filled with endless corridors and cheap linoleum, or low-grade flats last renovated sometime around 1962.
Today’s accommodation is a world apart. Students expect the full accoutrements of modern living – dishwashers, high-speed broadband, WiFi, big-screen televisions, satellite channels, pool tables, heating and even fortnightly cleaning are often all included in the rent. Students – they have never had it so good, to misquote Harold Macmillan. UK student accommodation has become a high-performing property asset class of its own, attracting investment from around the world.
How it happened
The shift began in the late 1990s. Entrepreneurs such as brothers James and William fforde, backed by venture capitalist Cabot Square, spotted a gap in the market for high-quality student accommodation, which they sought to fill with their UniLodge concept. In a 1997 article in the Glasgow Herald, James fforde pointed out that universities did not mind the competition his company posed to traditional accommodation: “What UniLodge can do is give universities the freedom to direct funding resources towards education, while enjoying dedicated accommodation supplied as a stand-alone fully financed service.”
Like many early pioneers in a sector, the ffordes sold up and moved on to innovate in other fields. But their legacy lives on. Modern student accommodation tends to be high-spec studio flats or cluster flats with between three and six en suite bedrooms.
The major players
Today, there are five main types of player in the UK student accommodation sector. Firstly, those who own and manage the accommodation themselves. The industry leader is Unite Students, which now has more than 43,000 bed spaces in around 130 properties across the UK.
Secondly, there are investors, such as German fund Bouwfonds, which buy property or invest in student accommodation real estate funds (such as Unite’s £1.5bn UK student accommodation fund). They appoint a third type of player – student accommodation management experts like Fresh Student Living and CRM Students – to manage their properties. Fourthly, of course, are the banks.
Lastly, universities remain closely involved in the student accommodation field. While they sometimes still develop and run the properties themselves, more commonly they now enter into arrangements with the private sector. These can take the form of traditional lease agreements, income strip deals (with the university subletting to students) or nominations agreements, where the universities guarantee a rental income stream in exchange for the right to nominate/reserve rooms and accommodation operators agreeing to abide by a service level agreement. These arrangements are typically for one academic year, but can often run for longer.
The future for student accommodation
The industry faces a number of challenges in the years ahead. The Scottish government is currently consulting on a new form of private sector tenancy. Its primary aim is a clearer and simpler system.
However, while it says it recognises that short-term rent caps could be counterproductive, it has asked whether specific measures may be justified to protect sitting tenants from “excessive” rent increases in “hotspot areas” (essentially Edinburgh and Aberdeen).
In England, the Labour Party has been calling for the introduction of three-year tenancies with a ceiling on rent increases. But the property industry is making clear its view that rent control could dissuade investment just at a time when politicians are keen to encourage institutional investment into the private rented sector (PRS).
As for student numbers, although they fell following the introduction of higher tuition fees in England in 2012, they have recovered since. 2014 saw a record intake for UK universities. The Westminster government has also predicted that the removal of the student numbers cap in England, with effect from the 2015-16 academic year, will mean that the number of students entering higher education each year will increase by 60,000. Universities in Scotland remain attractive to Scottish and overseas students owing to the absence of tuition fees for them.
Is the market saturated?
Space for new-builds is hard to come by in London. However, the current pipeline of deals in the regions and in Scotland shows that, provided the location is right, a viable return on investment is still expected.
In addition, the growth of the non-student PRS, particularly evident in the regions and Scotland, offers an opportunity to student accommodation operators, who can use their knowledge and skills to extend their business model into the construction and management of other types of large rented developments. These are particularly attractive to “generation rent” – young graduates who find purpose-built PRS developments suit their busy, modern lifestyles. Having spent their student years in high-quality managed accommodation, they trust the product, and they trust the companies providing it.
Opportunity knocks
At the same time, government is starting to realise that traditional housebuilders are unlikely to be able to provide the number of affordable homes needed to satisfy the growing UK population, and that large-scale PRS developments may hold the key to providing new homes. Institutional PRS development is still in its infancy, with recent figures showing that only 1% of PRS in the UK is owned by institutions. In contrast, the figures for the US, Germany and the Netherlands are 13%, 17% and 37% respectively.
So there is a great opportunity for existing student accommodation operators to expand into this market. Student accommodation has been recognised as a distinct property asset class in the UK for many years now – and with the ongoing drive by the Westminster and Holyrood governments to increase student numbers, growth in the sector looks set to continue.
Legal issues in student accommodation – what new entrants need to know
Tax
There are tax benefits – and potential pitfalls – for those developing, buying and selling student accommodation. Matters to be aware of include the recovery of VAT on construction costs – the so-called “golden brick” rule – as well as Capital Goods Scheme rules, and multiple dwellings relief from both stamp duty land tax and land and buildings transaction tax. Specialist tax advice is critical.
Planning issues
Student developments increasingly form part of multi-use developments, with other elements ranging from offices and health centres to ground-floor food retail – students seem particularly attracted to developments with a fast-food outlet. Some student accommodation is also used for holiday lets over the summer. Good planning advice is therefore important. And despite evidence showing that complaints about student noise tend to centre on flats in traditional residential blocks and tenements, rather than specialised managed accommodation, planning applications for new student developments can be difficult to steer through to consent. Appeals against refusals are becoming increasingly necessary in some areas.
HMO
Houses in multiple occupation (HMO) legislation may have been
introduced to protect students from unscrupulous landlords who did not bother about safety fundamentals such as a fire escape, but the rules apply to the larger-scale operators too. The rules, particularly in Scotland, are not always straightforward and the way local councils implement them in relation to the transfer of existing stock and new developments can vary from area to area. In Scotland, the owners and managers of private accommodation also need to be registered as landlords with the relevant local authority.
Student deposits
There are different, mandatory, tenant deposit schemes for each UK nation.
Direct lets
If the correct form of tenancy agreement is not used, the accommodation provider may not be able to evict the student in the usual way at the end of the tenancy. The local authority may also want to review the form of tenancy agreement being used as part of the HMO process. Bear in mind the underlying legislation is different in Scotland from the rest of the UK, so a standard form of agreement used in England will need to be tailored by a lawyer north of the border. The relevant law in both jurisdictions may also be set to change.
Nominations agreements
Many universities have a preferred standard style – but these are often heavily weighted in favour of the university and may sometimes effectively seek to fetter an owner’s ability to sell the accommodation, or grant bank security over it, without university consent. It is recommended that these agreements are reviewed by a lawyer, particularly if they cover more than one academic year.
Funding
The usual bank requirements apply. So, for example, in the case of a new build, the bank will expect collateral
warranties from the building contractor and the professional team. Particularly for new entrants into the sector, banks often want to see some kind of
assurance of mid- to long-term
income – such as a five- or 10-year nominations agreement with a university or other established higher education provider covering a significant number of rooms.
Roland Smyth is a senior associate in the real estate team at law firm CMS and is part of the firm’s specialist student accommodation team. He is based in Edinburgh and has more than 15 years’ experience providing specialist advice to the student accommodation sector.
