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Student Accommodation - Weathering the Storm

Sarah Jones • 21/04/2020

Universities closed their physical doors in mid-March and made a rapid transition to virtual teaching. Most universities have enabled students to leave accommodation contracts for the summer term, and summer business has been cancelled. A number of private accommodation operators followed suit by allowing students to request a refund of summer term rent. 

Many students remain in residences, including international students unable to leave, careleavers and those affected by the virus, and work continues to ensure the safety and welfare of residents. Cushman & Wakefield data suggests that the cost to the main private sector providers offering contract releases is almost equal in size to universities, accounting for a proportion of revenue for the summer term, and resulting in short term pressure on university and investor cashflows.

Looking forward, COVID-19 makes planning difficult for the forthcoming academic year. Universities face uncertainties around recruitment, with caps on UK student intake proposed by Universities UK to restrict aggressive competition, as universities seek to backfill the partial loss of up to £7bn in international students’ fee income.

Some UK students may choose to sit exams in the autumn, thus delaying their entry into university until January or the following year. Private accommodation providers who support universities (short-term/soft nominations) may find less certainty of agreements, and direct-let providers are planning for all eventualities as the situation is changing daily.

The lack of certainty over the 2020/21 academic year and impact on student intake has caused some investors to be more cautious. This, combined with general uncertainty in the wider real estate sector and turbulence in the debt markets, has significantly reduced transaction volumes. Equally, challenges for developers and contractors in completing schemes in time for September, given current labour and supply constrictions, may cause a number of schemes to be delayed or mothballed for the 2020/21 academic year. This will have an impact on investors’ cashflows, however, given the relatively low levels of debt compared to 2008, investors in most cases should be well placed to weather any short-term dislocation.

One speck of light for providers is the alternative use of student accommodation. Many residences are located close to teaching hospitals and universities are typically one of the largest organisations in any city. Conversations are taking place with the NHS and councils to house key workers, the sick and the vulnerable, subject to inevitable logistical challenges. Whilst this might represent a modest source of alternative revenue for investors, it is also a means whereby all providers are able to meaningfully assist with the current crisis.

Post COVID-19, there are reasons for optimism. The UK 18 year-old population is growing again and participation in higher education continues to rise. During a period of economic regression, even more may turn to higher education. Virtual teaching for first year undergraduates is being ruled out by some universities, in favour of students being fully immersed in the university experience. Non-UK students value the quality of our higher education and demand pre-COVID-19 was at an all-time high. We expect an increase in demand from students (both overseas and domestic) and investors once there is some degree of certainty.

 

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