A fair race? Making PBSA stack in the race to September

Deliverability as important as viability

It’s no secret that pressures are felt by the whole of the living sector in the endless discussions around viability challenges. Any living sector developer now operates against a backdrop of rising construction costs, higher borrowing rates, increasing regulatory scrutiny, and growing investor focus on delivery risk.

But unlike most other living assets, PBSA is all built around one thing – an immovable date in the calendar.

It is acknowledged that for traditional build-to-rent schemes, delays undeniably may impact income and cash flow, but the fundamental difference is that, in general, residents can generally move in throughout the year. Student accommodation operates differently - the vast majority of lettings are tied to the start of the academic year, creating a hard operational deadline. For developers, investors and operators alike, missing September can have really serious consequences. Lost rental income, increased financing costs, reputational damage, occupancy challenges and exposure under contractual arrangements can all arise if a scheme is not ready when students arrive.

So if we ignore for a second the consideration around whether a scheme can be built in the first place, a paramount consideration in any development appraisal is actually whether the scheme can be occupied on time notwithstanding all the viability challenges.

BSA bites

Many of the same concerns on the regulatory framework created under the Building Safety Act exist for students as the other living asset classes, and this legislation adds a further layer of complexity to the challenge of delivery, especially delivery on time.

For higher-risk buildings (of which student blocks often sit), obtaining Gateway 3 approval is a prerequisite to occupation and at the time of writing, delays in approval timings are still a major issue. Whilst the statutory regime envisages decisions being made within prescribed timescales, market commentary and experience tells us there isn't enough resource to get these approvals through quickly enough. The difference now within the BSA regime is that practical completion isn't the holy grail – getting past the finish line of the gateways marks your path to success and deliverability.

You simply have to build in time for potential delays in getting gateway approval and for student living, this can potentially cast further doubt on winning the race to September. Simply put, if you don’t have your gateway approval, students aren’t occupying the space, no matter what month you are in.

How do developers manage the risk?

If a scheme makes it through the blocks at the development appraisal stage and is on track for delivery, how do we de-risk the deliverability risk? This is where the lawyers add their value – this timing risk has to be reflected in contractual arrangements. Liquidated damages provisions on PBSA projects are particularly significant due to the wide reaching financial consequences of delayed occupation. Unlike more generally across the living sector, a delay does not simply impact the construction programme - it can affect lettings, operational performance and ultimately investor returns.

In terms of the project as a whole, a scheme must be well thought out from the very outset, ensuring that building safety requirements are considered throughout the design and construction phases rather than treated as an afterthought and administrative burden at the final hurdle. Back to the lawyers again – we can also make sure there exists granular detail around contractual risk allocation (especially in a delay on Gateway 3), programme assumptions and the practical steps required to secure occupation as quickly as possible.

What does good PBSA look like?

Traditionally and before the challenges around viability were so acute, many PBSA schemes were assessed primarily on location, bed numbers and projected rental income. The major stumbling block was planning consent but then the route through to September was more certain.

An interesting commentary one of the agents states that, against the backdrop of a much wider range of variables, investors and funders are actually paying as much attention to deliverability as they are to headline returned due to the nuance in the PBSA sector of the single principal letting cycle each year. As a result, the most successful PBSA developments are no longer necessarily those that maximise bed numbers or achieve the highest specification – they're the schemes most likely to be delivered and occupied on time.

We're seeing a growing focus on efficiency of PBSA schemes, including more consideration over optimising layouts, thinking really critically about amenity provision and what is really necessary and desirable to ensure that every square foot counts. So rather than creating the shiniest building on campus, it needs to be accommodation that students genuinely want and can afford and, most critically, can occupy in alignment with their start at university.

Can PBSA cross the finish line?

It is definitely acknowledged that the PBSA sector remains one of the more attractive areas of the living market as demand for beds in cities is high as further education is seen increasingly important. However the challenges around delivery of the schemes has led to some evidence of students moving from the traditional PBSA offerings into the world of BTR. Does this perhaps represent a blurring of boundaries between the two? Market sentiment tells us currently that student living remains attractive to students and BTR is most likely out of reach for many students.

So where PBSA still has a strong place in the market, successfully completing the race for developers isn't purely a question of whether a scheme can be built. It is whether it can be designed, funded, constructed, approved and occupied to cross that finish line for September.

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