STUDENT ACCOMMODATION WHAT YOU NEED TO KNOW ABOUT STUDENT ACCOMMODATION IN SCOTLAND image source: Powis Place, Aberdeen Lothbury Investment Management
Student accommodation what you need to know Scotland is well known for the quality of its educational institutions. In an increasingly global education marketplace, these institutions face tough competition when it comes to attracting students. The cost of maintaining and enhancing the academic experience inevitably eats into capital expenditure budgets for the provision of much needed accommodation, leaving a gap to be filled by the private sector. That, coupled with a demand for a more modern, high specification product, has led to a surge in the development of Purpose Built Student Accommodation (PBSA) in recent years. The enhanced amenities and generally cleaner and more modern feel of PBSA attracts a rental premium in comparison to older university or mainstream residential rented accommodation, making it a popular product with investors. PBSA s comparative simplicity as an asset class, perception as having strong defensive characteristics and, in recent years, the relative weakness of the pound, have rendered it a highly attractive investment to overseas buyers, particularly North American, Middle Eastern and Far East investors. Student Accommodation the numbers speak for themselves In 2017 approximately 4 billion of Purpose Built Student Accommodation stock was transacted.* and an estimated 944 million in Q1 2018.** On average rents continue to rise across the UK, with a 2.9% rise in average rents last year building on 2016 s 2.6% increase.*** *GVA Student Housing Review, Spring 2018 **CBRE UK Student Accommodation: Five Big Trends in 2018 ***Cushman and Wakefield Student Accommodation Report 2017 The majority of the beds were traded by way of portfolio sales, with the biggest in terms of number of beds being Brodies client Brookfield s acquisition of the 5,507 bed Enigma portfolio. Over 45,000 beds traded in 2017 Source: (Cushman and Wakefield Student Accommodation Report 2017).
23,000 PBSA bedrooms due to be completed across the UK by the start of the 2018/19 academic year.......... 84% of those are private sector... compared to 16% being constructed by educational institutions Purpose Built Student Accommodation (PBSA) how is it done in Scotland? Scotland has proven to be an attractive home for a large number of developments in recent years and the pace of development continues with schemes being built by a mixture of developers, both local and well known UK names. So what are the key considerations? Planning The planning system has been evolving to cope with the rapid expansion in PBSA with each planning authority developing its own approach. Some authorities have classified student accommodation as falling within a use class while others have regarded it as sui generis. Classification matters when it comes to how the accommodation can be used outwith term time and future changes to mainstream residential use. Some authorities have promoted specific policies to address this sector, including policies aimed at preventing an excessive concentration of student accommodation in any one area, and ensuring acceptable living standards and sound accommodation management. Glasgow City Council, for example, generally looks to secure appropriate provisions in Section 75 Planning Agreements (similar to Section 106 in England) for student accommodation requiring a management plan to be put in place and restricting occupancy to visiting staff and to students attending courses of study and summer schools. Developing In addition to general development considerations, there are some specific points which need to be considered in a PBSA development in Scotland. While viewed as a commercial real estate product, the end user accommodation is residential, and so it must be designed and built so as to comply with the relevant regulations and standards, including ensuring that flats intended for three or more persons are HMO compliant.
The other major factor to consider is the impact of the academic year on timing and delivery of a PBSA development. Having stock completed and ready for occupation with all requisite local authority consents in place ahead of the start of the new academic year is crucial. Failure to hit that deadline can result in costly penalties, including the cost of housing students in expensive alternative accommodation and running the risk of students securing accommodation elsewhere and being unwilling to move prior to the next academic year. Funding When it comes to funding PBSA, lender appetite remains strong, with funders being a mix of traditional high street lenders and alternative lenders. Current trends are: Traditional high street lenders leaning more towards development funding; Preference for Nomination Agreements but lenders will finance direct let schemes without university tie up; Facility Term: Typically three years; five years maximum; Majority are single asset transaction lendings. It is anticipated that future lender funding criteria will narrow with greater emphasis on location, affordability and de-risking income stream. Tax The tax treatment of student accommodation projects is notoriously difficult and has been subject to significant change in recent years. If not properly addressed, it can lead to unforeseen liabilities and missed opportunities for tax savings and efficiencies. LBTT In Scotland, land and property purchases are subject to Land and Buildings Transaction Tax (LBTT), a devolved Scottish tax different from both Stamp Duty Land Tax and Land Transaction Tax which apply elsewhere in the UK. LBTT is a progressive rate tax with different rates of LBTT applying to residential and non-residential acquisitions. The highest residential rate is 12% (applied to the part of the price over 750,000). The highest non-residential rate is 4.5%. The purchase of bare land for a PBSA development is subject to LBTT at the non-residential rates. The purchase of completed PBSA developments is also subject to LBTT. Although each unit in a PBSA development ordinarily qualifies as residential property, a purchaser can benefit from the lower non-residential rates if they purchase six or more units. This same carve-out from the higher residential rates applies to the 3% LBTT surcharge (the Additional Dwelling Supplement). Purchasers of completed PBSA can also benefit from LBTT multiple dwellings relief (MDR), which can significantly reduce their acquisition costs below the non-residential rates. Old fashioned halls of residence do not qualify for MDR but also do not attract the LBTT Additional Dwelling Supplement.
VAT UK VAT applies in Scotland as it does in the rest of the UK. There are two principal VAT issues to bear in mind with a student development: ensuring maximum recovery of input tax and avoiding any self-supply charges, which could potentially trigger an unexpected VAT charge years after a building is completed. On the first disposal of a new PBSA development, conditions must be met in order to achieve a zero rating for VAT including demonstrating that the property is substantially occupied for residential purposes. In order to recover the maximum VAT incurred in a PBSA project, the completed development is often transferred or leased to a separate entity (or a third party) who then enters into the letting arrangements with the students. Please see our separate guide Investing in Student Accommodation-a handy tax guide for more detail on the various tax considerations and implications relevant to PBSA. Structuring The maturing market continues to provide a choice of model for investors and operators. The most common structures include: EDU Lease The educational institution (EDU) signs up to an institutional long lease. Due to peculiarities of the Scottish landholding system, lease periods often tend to be 20 years or less, although schemes for longer durations are put in place. The EDU then operates, manages and uses the PBSA as if it were the owner and leases the rooms to students on tenancy agreements. At expiry of the long lease, the EDU returns the property to the landlord in accordance with the conditions set out in that lease or is given the option to buy the freehold at a nominal sum. The asset created allows the owner to buy, sell, fund and/or trade the leased property as an income producing asset for the benefit of its investors. Variations within the leasehold model include Ground Lease/Income Strip deals, where the EDU uses its own land and either sells the freehold or grants a long lease of the land to the investor who then leases the property back to the EDU in return for annual rent (usually after having developed or refurbished the accommodation). Repair and operational liabilities rest with the EDU and student tenancies are typically dealt with by the EDU. If the freehold has been transferred this will be returned to the EDU for a nominal sum at expiry of the agreed duration of the income strip.
Nominations agreement The owner of the property or the landlord under a long lease constructs the PBSA and then enters into a nominations agreement with the EDU. In terms of that agreement the landlord/owner agrees to provide the EDU with a minimum number of bedrooms for a specific duration which in turn permits the EDU to guarantee accommodation arrangements to their students. Direct lets The landlord/owner grants tenancy agreements to the students, without any formal tie-up with the EDU. The risk is greater, but so are the returns. Having an attractive and well located scheme is essential to success. In larger scale PBSA, the day to day management of the accommodation will be taken care of by a management company connected with the landlord/ owner. Design, Build, Finance and Operate (DBFO)/Partnership schemes DBFO Partnership schemes are becoming increasingly popular as EDUs look to limit the impact of accommodation provision on balance sheets. There are several variations but a typical structure involves a Student Housing Partner (SHP) acquiring, usually by long lease, EDU-owned land in return for a capital payment to the EDU. The SHP will then develop the accommodation scheme or refurbish existing stock on the site, and then operate the scheme, including tenancies, and retain the income. The SHP will be responsible for repair and maintenance. The EDU has the option to nominate a number of rooms in each year, with the SHP marketing the remainder. At the end of the agreed period the site is returned to the EDU. 2017 initial yields Lease Nomination agreement Direct let Prime London 3.75% 4.25% 4.25% Super Prime Regional 4.25% 4.75% 5.25% Prime Regional 4.50% 5.00% 5.50% Secondary Regional 5.00% 5.75% 6.50% Source: Savills Research Operating PBSA HMO and Landlord registration An HMO (House in Multiple Occupation) Licence is required where three or more unrelated persons including students share a house or flat and kitchen or bathroom facilities. This must be in place before the property can be let to occupiers. PBSA will generally require an HMO Licence unless it comprises studio flats with their own kitchen and bathroom facilities. Owners (not managers or occupiers) of PBSA, including EDUs, must obtain the licence and renew it either annually or every three years, depending on the local authority concerned. Whenever ownership of the property changes hands, a new licence must be obtained; an existing licence cannot be transferred to a new owner.
Every new licence and renewal application comes with a fee which differs between local authorities. Failure to have an HMO Licence in place can result in sanctions being imposed, including a prohibition against continuing to let the property. Every landlord of residential property in Scotland must also register as a residential landlord with the relevant appropriate local authority and satisfy a fit and proper persons test; this is a separate and additional requirement to the need for an HMO Licence. Tenancy agreements In December 2017 a new form of tenancy was introduced by the Scottish Government for the majority of residential lettings in Scotland-the Private Residential Tenancy (PRT). PRTs provide enhanced security of tenure to tenants, but PBSA providers of more than 30 beds with planning permission for student accommodation are not obliged to follow the PRT form. The Scottish Government included this concession in the legislation to give PBSA providers the flexibility needed to manage their properties to suit the academic terms following representations made by Brodies and others. Deposits Tenancy deposits including those for PBSA must be properly registered and protected in an approved deposit scheme which protects deposits until they are due to be repaid. A landlord must pay deposits into an approved scheme within 30 working days of the tenancy starting and ensure that the money is held there for the duration of the tenancy. The tenant must be provided with specific information about the deposit and the scheme which will be protecting it. There are currently three approved schemes provided by independent operators in Scotland: Letting Protection Service Scotland, Safedeposits Scotland and My deposits Scotland. Letting Agents Code of Practice Letting agents in Scotland must comply with the new Letting Agents Code of Practice, which includes requirements to register in the Register of Letting Agents, meet certain training requirements and pass a fit and proper person test. Depending on how owners of PBSA structure their business, for example if they use connected but separate operating companies to grant or manage the tenancies, the Code may apply. Lady Nicolson Court, Edinburgh Student Roost
Collegelands, Glasgow Brookfield Where to now? With the early PBSA schemes now approaching the 10 year mark, there are inevitably questions about where the sector heads next. Trading of the top portfolios seems likely to continue, at a premium to single assets, with demand continuing to outstrip availability. Reports suggest that across the UK as a whole there remains a structural undersupply of PBSA, with two students for each PBSA space. And in Scotland in 2018, there was a 1% year-on year increase in the number of students applying for courses. The PBSA product is particularly attractive to overseas students, a rising demographic within the sector, with 1 in 5 of the UK s approximately 1.7 million students coming from outside the UK. All of which points to the sector continuing to enjoy its popularity with investors. Affordability is becoming a concern in certain locations, particularly in those areas well served by a number of schemes. In terms of student and university-led demand there is a shift away from the more expensive studio accommodation towards the more affordable cluster and shared accommodation. Redevelopment or refurbishment of older stock, with the benefit of acquiring sites with established presence (and planning consent) could perhaps offer an opportunity to deliver a more affordable product. For other older schemes, it may be time to look at alternative residential use-mainstream or affordable housing, private rental, or even hotel use. The developing Build to Rent Market may also present opportunities (without disregarding the potential for competition over sites). There would seem to be a natural fusion, with established PBSA operators having the means and know-how to deliver the BTR product, possibly as part of mixed use Generation Rent schemes. Equally the former PBSA occupiers, now embarking on graduate careers, seem to be a natural target for the BTR market, having already experienced a premium rented product. Whatever type of development, investment or operation is opted for, there can be no denying that PBSA is an attractive proposition for all who want to get involved.
Brodies and PBSA PBSA, now established as a recognised asset class in its own right, has evolved dramatically over the past 10 years and there will be further evolution of the sector and the models used to deliver it. The challenge for all in the sector will be to identify and keep pace with the changing trends. At Brodies, our team is experienced in the development, leasing, investment in and funding of PBSA projects and will work with you to achieve your objectives. Recent deals done by Brodies Acting for Liberty Living in connection with the Scottish aspects of the sale of the Brandeaux portfolio of student residences and on the Ziggurat scheme in Leith Walk, Edinburgh and Murano Place. Acting for Henley in the acquisition of a student accommodation scheme in Dundee from Crosslane and the purchase of a portfolio comprising six student accommodation sites throughout the UK. Acting for RBS in the funding of a 400 bed student accommodation development by Structured House in Glasgow. Acting for AXA on their forward funding of student accommodation in Edinburgh and subsequent lease to Napier University. Advising Mace Group on the acquisition of a former Deaconess hospital in Edinburgh, redeveloping into 318 bedroom student accommodation. (Forward sold to Edinburgh University). Acting for Cityheart Ltd in their new student accommodation developments for Napier University at Fountainbridge, and separately at Orwell Terrace in Edinburgh. (Funded by Standard Life). Acting for Brookfield in their forward funding and acquisition of a 350 bed development at St Mungo s, Glasgow. Acting for Greystar (Goldman Sachs) in the acquisition of student accommodation in Bath Street, Glasgow. Purchase and development of 3 sites (Fort William and Inverness) for the University of the Highlands and Islands. Acting for Lothbury Investment Management on the purchase of student accommodation sites in Aberdeen, St Andrews and Durham Acting for Brookfield/Student Roost on the Scottish aspects of the acquisition of the 520m Enigma portfolio, and a separate 13 property student accommodation portfolio from Unite Students. Advising iq Student Accommodation on acquisitions and refinancing of various operational sites across Scotland together with a proposed forward funding development in Edinburgh.
Key contacts Chris McDaid PARTNER Real Estate +44 (0)131 656 0295 chris.mcdaid@brodies.com Richard Smith PARTNER Real Estate +44 (0)141 245 6284 richard.smith@brodies.com Johane Murray PARTNER Head of Real Estate +44 (0)141 245 6230 johane.murray@brodies.com Helen Abrams PARTNER Real Estate +44 (0) 131 656 3772 helen.abrams@brodies.com Neil Collar PARTNER Planning +44 (0)131 656 0125 neil.collar@brodies.com Isobel d'inverno DIRECTOR OF CORPORATE TAX +44 (0)131 656 0122 isobel.dinverno@brodies.com Join the conversation at our real estate blog brodies.com/blog/real-estate
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