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Chris Owens warns universities to start planning for increased pressure on student accommodation

With record numbers of 18-year-olds going to university in 2021/22, the highest peak in this demographic for decades expected in 2030 and continued high participation rates, domestic demand for places at UK universities is likely to remain strong.

Internationally, the star of UK HE plc is high, and demand from the US, China, Nigeria and India in particular is growing (although current events and those of the last couple of years may mean the shape of international demand remains fluid for some time).

Since the student accommodation market is already under-supplied, all this means that unless the government imposes significant student number caps as a result of its current consultation, universities will need to get their student housing plans in order now to prepare for a period of sustained growth.

The current picture

The UK has around 681,000 purpose-built rooms dedicated to student accommodation and demand outstrips supply. In some places, this puts pressure on private sector rental housing and leads to tensions between universities and their local authorities and populations. Purpose-Built Student Accommodation (PBSA) might appear a happy solution and there are a number of potential models available.

Direct let PBSA, whereby the accommodation is built and operated by a private operator who lets beds directly to students, is one. While direct let operators have experienced challenges recently, thanks to coronavirus, market activity suggests investors remain confident in their resilience and they will certainly have a role to play in meeting future demand. Around 1,150,000 beds are currently in the pipeline.

One way that universities can tap into those direct let beds is by entering into nominations agreements. These can take many forms. Some act as stop-gap solutions for a single academic year and some reserve rooms for several years and so form an important part of a university’s accommodation portfolio.

An alternative, for universities that have the land and the budget, is self-build. With pressures on university balance sheets caused by Covid, this may not be an option for many, but refurbishment may offer a half-way house. This could at least upgrade accommodation and may provide opportunities for using green technologies to improve efficiency, although it is likely to improve the quality of existing supply rather than materially add to the supply pool.

The past few years have seen a growing use of DBFO (Design Build Finance and Operate) models and long-term partnerships between universities (including York, Sussex, Birmingham, Essex, Leicester, Exeter and Durham) and private sector partners to deliver additional beds on university land.

Generating capital

If a university cannot afford to replace or enhance existing buildings, one option is to transfer the buildings to someone who can. Rather than being seen as land disposal, this may allow a PBSA operator or DBFO partner to come in and replace, add to or refurbish existing accommodation and generate some form of capital receipt for the university.

DBFO models essentially create a long-term (usually around 50 years) partnership between a university and the DBFO partner. The DBFO partner will build or refurbish and then subsequently maintain accommodation on university land and borrow long-term debt from third party funders to finance the project.

The university has the annual right but not the obligation to nominate beds (meaning the project should be off balance sheet). The DBFO partner keeps most of the rent but pays a capital receipt to the university up-front or the university can seek facilities such as a car park or academic building in lieu of a capital receipt. The university would be the student’s landlord.

These kinds of arrangements have grown in popularity and can play a key role in allowing universities to develop their on-campus accommodation without having a negative impact on their balance sheets. Indeed, with capital receipts potentially running into tens of millions of pounds they can provide a significant cash injection for universities. Importantly, investors and funders remain keen on the model.

They are open to all institutions, with the bond funded DBFO model more likely to be available to mid and top ranked universities and the off-balance sheet model available to lower ranked institutions.

Student wellbeing

While the world has woken up to the importance of wellbeing since living through multiple lockdowns, universities have been alive to the issue for many years. Where a student lives, and the type and quality of services offered there, is essential to their wellbeing and needs to be looked at closely in terms of a university’s accommodation offering.

Whichever accommodation model universities use, there will be common issues to consider.

First, design. The accommodation cannot just be seen as “a block of flats”. There needs to be social space and areas that encourage students to mix and that engender a sense of belonging.

Then, community-building. A university or operator must work with the design to run social activities to generate a community feel and sense of belonging. Integration of international students needs particular consideration.

Finally, training. Accommodation staff need to be trained in identifying and reporting signs of possible mental health problems and in understanding the processes to be followed. Universities and their partners need to work together to ensure a consistent approach to supporting students in this regard.

As they look to a period of continued student number growth, universities need to start planning how they will respond to meet that demand by providing quality accommodation that has student wellbeing embedded at the heart of its design. The private sector is ready and willing to help but action needs to be taken now to be ready for the 2030 peak.

Chris Owens is a legal director at Pinsent Masons LLP (winners of professional team of the year 2020 and 2021 at the Property Week student accommodation awards). He specialises in student accommodation procurements, advising both universities and private sector bidders.