Optivo has around 3,000 units in its student portfolio. In 2019/20 it brought in £16m in revenue and generated a surplus of £3.4m.
Tom Paul, director of treasury and commercial at the 45,000-home organisation, reveals that income from the group’s student assets “dried up” over the summer, meaning that it will have lost revenue for its student business for around a quarter of the year. While lower student occupancy over summer means that won’t equate to a quarter of its £16m total turnover, it is nevertheless a significant hit.
“Normally we’d have people staying over the summer,” he explains. “That stuff completely disappeared so the summer was lost income.”
However, he adds that some of that lost revenue is mitigated by lower costs for cleaning and utilities, for example: “It’s not like you lose the revenue and keep all the cost.”
Mr Paul says he “wouldn’t expect valuations to tank” in the student market but does accept that the situation around the pandemic will force a conversation about the long-term viability of these assets.
“When any charity is investing you’ve got to constantly look at whether you’re getting the best value or whether you should dispose and reinvest in the core business,” he continues.
“Every year I go to the board and have that discussion with them because that’s what you need to do, to constantly re-evaluate. With student accommodation, we do it to make money and reinvest. It’s not our charitable mission to let expensive student accommodation.
“So there’s always a discussion to have – it’s the same with our commercial real estate. Why do we own it? Is it the right thing to own it?”
“Normally we’d have people staying over the summer. That stuff completely disappeared so the summer was lost income”
At Optivo, around half of its student homes are rented as ‘direct lets’ to students, while half are let through nomination agreements with individual universities. These two ways of managing student accommodation carry different levels of risk. Any association doing direct lets is at the whim of a now-unpredictable market.
However, those that have nomination agreements will have voids underwritten only up to a certain level – typically around 15 per cent. That means any association that lets its student homes out through one of these agreements but finds its beds less than 85 per cent full could be on the hook to make up the lost revenue.
Richard Petty, head of UK living advisory at JLL, estimates that there is “very little direct let and very little fully underwritten by institutions”, meaning that most sit in what he describes as “that middle ground of nomination agreements”.
He says: “We’re really not picking up any great concerns from the RPs yet about their business plans or the value of those assets.
“I suspect that problem will start to manifest itself when we do year-end valuations at March 2021, when we’ll be looking at actual occupancy levels and rent collection levels. There’s bound to be a question then in the RP sector around impairment and whether we’re looking at permanent or structural diminution in the value of assets – and that will come back to the terms of nomination agreements.”
While he says that some associations might look at selling off student stock, the majority will take a longer view.
“From the RP’s point of view, they’re in this for the long term. Some have owned [student housing] for more than 20 years and one blip won’t see them running for a sale. Most have a conservative approach to financial planning, whether around student housing or other diversified assets; they’d have built in a level of structural void loss. If they exceed that slightly for a year or so, I don’t think it will bother them.”
“Before COVID hit, they were looking like they were going to have the best year ever in terms of occupancy, rental growth. Now, it’s more of a mixed bag”
Mr Petty’s colleague Rose Denbee, who leads JLL’s student housing business, is optimistic that the market will bounce back. “Before COVID hit, they were looking like they were going to have the best year ever in terms of occupancy, rental growth; everything was looking fantastic. Now, it’s more of a mixed bag. London has been hit harder.”
She says she expects housing associations will want to hold on to stock “rather than sell something with lower occupancy for one year”. That is especially the case given that buyers are likely to demand rent guarantees in the current market.
Mr Paul at Optivo agrees – and suggests that reports of the collapse of student housing are premature. “People aren’t thinking doomsday; the short term has been difficult but it’s still [performing] better than plenty of other real estate asset classes. Students will still want to meet up. What they get is far more than a bed and clean bathroom – I think the halls experience is missed and will be here to stay.”