Studying the future

The outlook for developing student accommodation remains positive in the face of challenges posed by the effects of the global pandemic, says Chris Aldred, director, Operis

There is much discussion about what shape the 2020/21 academic year will take at UK universities and what the student experience will look like. Lecture logistics are being adapted to facilitate social distancing and online delivery as part of a “blended learning” approach.

Cambridge University, for one, has said that smaller tutorials/seminars will continue in person. Planning will need to continue to adapt as government guidance changes over the coming months. This will feed into students’ choices and into student numbers for the coming year as we wait to see whether the received wisdom – that an economic downturn is a good time to study, rather than enter a tough job market – is borne out.

Accommodation is a key element of universities’ offer to prospective students. The provision of purpose-built student accommodation has grown hugely over recent years but is still unlikely to be able to keep pace with a demographic profile which will see a 10% increase in the cohort of 18 to 21-year-olds by 2030.

The university partnership model for developing student accommodation has been a success story in the social infrastructure sector at a time when the pipeline of greenfield PPPs has run relatively dry. Universities have been able to improve their estates and their attractiveness to students while typically being paid a financial premium to do so.

These schemes are usually located on or very close to the main campus of the university in question. The prime location, combined with certain types of contractual support which have become standardised as the market has blossomed, allows the private sector to design, build, finance and operate accommodation while assuming the risk that there will be a sufficient number of students wanting to live in the accommodation.

Lenders and investors in the sector have become experienced at evaluating the demand for accommodation at each institution and structuring projects accordingly. Such demand analysis will take account of factors such as the amount of competing accommodation provision in the local area and where the proposed rents sit compared to the alternatives (other university stock, local purpose built student accommodation, houses in multiple occupation).

Off the back of this market analysis, the project’s financial model will be tested to destruction with a range of ‘what if’ scenarios exploring the effect of different occupancy levels and rent increases on lender cover ratios and investor returns. One which typically hasn’t been included in the analysis is the ‘covid scenario’: what happens if students are suddenly not able to attend campus despite longer term demand not having dropped?

Many universities, along with owners/operators in the private purpose-built student accommodation market, have done the right thing by their students in waiving rents for those who have been unable to return for the 2020 summer term due to Covid-19 restrictions. For some deals which raised debt against these cash flows, this will have left a financial hole which has had to be covered or restructured.

Two UK university partnership student housing schemes have been in the news lately as a result of credit rating actions.

Kingston University’s 1,333-bed PPP scheme with sponsors Equitix and ENGIE was given a preliminary underlying rating of BBB- by Standard & Poor’s (S&P), with the debt guarantee to be provided by Assured Guaranty bringing the overall rating to AA. Securing this investment grade underlying credit rating should allow the project to proceed to financial close: the first such closing since Covid-19 arrived in the UK. S&P cited the experience of the contractor, ENGIE, and the fact that the university will market the accommodation in parallel with its own stock as strengths of the deal.

The Kingston news followed the change of rating outlook from stable to negative on the A3-rated debt issued by Catalyst Higher Education (Sheffield) plc, the project company which operates a student accommodation PPP with Sheffield University. The move by Moody’s was a consequence of “the exposure to rents stagnation risk and the uncertainties around occupancy rates prospects due to the coronavirus outbreak”. The project reached financial close in 2006 and contains provisions including a minimum level of rental payment which is guaranteed by Sheffield University, something that has been less common on more recent deals which have generally seen a fuller transfer of occupancy and rental risk to the private sector partner.

There are undoubtedly challenges ahead for the UK’s universities, not least trying to understand the impact of the student number cap, which is being introduced in England to ensure “a fair, structured distribution of students across providers”, and the financial impact of Covid-19 could hit some institutions hard.

However, market sentiment around the student accommodation sector in general remains positive and continuing low yields on UK gilts (used as the base rate for most debt issuances in the sector) mean that there should be opportunities for well-structured deals to be done. As ever, it will be imperative to ensure that the fundamentals – university, demand story, rent levels – are sound, but for projects which can tick these boxes, there is no reason why the sector should not continue to thrive.