Private Student Accommodation: A Bulletproof Investment?
The development of and investment in purpose-built private student accommodation has long been hailed as a bulletproof investment with robust returns but whether or not it is capable of withstanding a global pandemic is a different matter. From financial forecasting to the pressures landlords are facing due to COVID-19, a number of possible strategies can be used in the interim.
Fast growth and financial forecasting
In the main university hubs in this country and particularly in London, the numbers of higher education students have risen year-on-year and particularly overseas students who have increased the demand for luxury student accommodation more recently, as they are prepared to pay a premium.
Bookings of student accommodation usually happen well in advance of the beginning of the autumn term and they are usually limited to the length relevant to the university year. This makes financial forecasts easier, enables annual increases in rent and sometimes those rents are guaranteed by parents. In the case of overseas students, this means that some or all of the year’s rent is paid in advance.
Economic crisis usually sparks additional demand for higher education and therefore purpose-built private student accommodation has often led the list of investments that are least affected by a recession.
Finally, a point not to be neglected is that the location of purpose-built student accommodation is often in less popular areas of university towns and therefore acquisition costs are relatively low. At the same time, areas to which students are moving tend to become more sought after, and their occupation can improve the neighbourhood and value of the area overall.
Impact of COVID-19
All in all, investors were mostly rewarded with good yields, but the pandemic has meant a considerable decline in income and many of the bookings last autumn were not honoured and students did not take up occupation. Universities are currently almost exclusively offering online lectures and attendance at the university campuses is not necessary. Therefore, students have campaigned for their ability to vacate their accommodation and to be let off the rent payments until the end of the term they had committed to. University-owned and managed halls have led the way in waiving rent payments to students and letting them off their tenancy agreements.
This has made the situation more difficult for student accommodation landlords, who are pressurised into accepting rent abatements, discounts and early terminations of tenancies before the expiry of the term.
Challenges specific to student accommodation
Landlords do not have to agree to discounted rents or an early termination of the student tenancies. The tenancies are usually granted for a fixed term and termination without cause is customarily not agreed.
However, where no upfront payments of rent have been collected, it will be very difficult for landlords to pursue students for outstanding rents and the disadvantages of student accommodation investments are transpiring: the student tenants either have no savings or income of note and/or they are located abroad and difficult to track down for rent arrear or breach of contract claims.
Landlords are facing two further challenges: the autumn term is still months away and there will be vacant units until then, with no guarantee that attended courses will resume at universities from October 2021.
For landlords of purpose-built student accommodation, there is generally no freedom to use the property for other residential purposes, such as housing. This is because this type of student accommodation is a sui generis use class and the letting to non-students is not permitted under planning laws.
If landlords agree to release current students from their tenancies, they are unlikely to be able to let the premises to any other students until the next autumn term intake. However, they may decide to postpone any existing bookings, rather than cancel them, to work towards full bookings in the next term.
Depending on the location, it is worth establishing with local planning authorities if an interim change of use is permissible to allow housing of non-students for limited period. This may be interesting for landlords of private purpose-built student accommodation that is coming up to its lifeline in terms of repair, so that emergency housing can be offered. It is important to ensure that the change in use remains temporary and can revert to student accommodation, when required. Needless to say, lender consent may need to be obtained before such change of use is sought.
In the short term, the impact of the COVID-19 pandemic will be felt considerably by student accommodation investors, as travel is restricted worldwide and teaching mostly moved online.
In the long run, however, the advantages of purpose-built student accommodation mentioned above will still apply. Even Brexit is predicted not to have a major impact on this type of investment as government intends to protect immigration for higher education purposes.
As students return to lecture theatres, the need for accommodation is likely to bounce back to pre-pandemic levels, and so will the occupancy of student accommodation. In the interim, landlords are well advised to negotiate with their tenants and try to pre-book for the coming terms with the expectation of continuing growth after the pandemic.
Armstrong Teasdale lawyers are actively monitoring and providing updates regarding the impact of COVID-19. For additional information, visit Armstrong Teasdale’s COVID-19 Resource Center. If you are contemplating the acquisition of student accommodation or you are experiencing difficulties with rent collections on your existing investment, it is recommended you seek legal counsel. Our commercial property team has extensive experience in the acquisition, sales, development, raising finance and landlord and tenant matters with a specific focus on purpose-built student accommodation. If you have any questions related to this article, please contact your regular Armstrong Teasdale lawyer or the lawyers listed on this advisory.