How to maximise your PBSA assets: part 3 - leasing up new buildings
June 5, 2020
In this next post in our series looking at the challenges and opportunities facing PBSA landlords, we take a dive into the risks facing new build PBSA assets coming out of construction, and how owners and operators can mitigate the risk of likely construction delays resulting in high voids and big financial losses.
- Part 1 - Maximising the summer period for PBSA assets
- Part 2 - Filling available PBSA units during term time
- Part 3 - Leasing up new PBSA assets
- Part 4 - Increasing the long-term trading value of PBSA assets
“Everyone has a plan until they get punched in the mouth.”
Let’s go back to early March 2020. You have an exciting new student housing scheme in development. Construction is well underway and due to complete early in the summer so that the asset can be leased up and occupied ahead of the start to the new academic year. There’s a solid plan in place, and things are on track.
Then COVID-19 strikes.
The world enters lockdown. Transport and travel restrictions result in significant disruption to supply chains, which in turn lead to construction delays. Projects that were due to complete in June 2020 now look set to complete in November-December 2020. In a normal world that would mean missing the start of the new academic year, likely resulting in low occupancy for the remainder of the year.
However this is not a normal world, and a regular academic year looks highly unlikely. The current reality unfortunately poses even greater challenges. There’s a very real fear that many universities will not resume face-to-face teaching at all until 2021. This, in turn, is prompting students to reconsider whether they should even accept their university place for this coming academic year, or whether they might in fact be better off deferring in the hope that normality will return and allow for a more social and enjoyable university experience. Frankly who can blame them - though it would be a disastrous outcome for PBSA landlords, leading to mass vacancies across their portfolios.
So, you have a new scheme that’s delayed and now coming to market a) mid-term time, but more importantly b) in a highly volatile market that’s incredibly hard to read. In any scenario it faces the prospect of significant voids, and likely for the remainder of the academic year. The scheme will incur council tax upon completion, and so will very quickly start burning an even greater hole in your pocket. What are your options, and how do you adapt your original plan when confronted with so much uncertainty?
Plan for the worst, whilst hoping for the best.
Successfully “leasing up” your PBSA scheme accelerates the stabilisation of the asset and ensures the project’s financial solvency in Year 1. Pre-COVID-19, a scheme would essentially come to market facing 3 possible scenarios in Year 1:
- “Disastrous” voids (i.e. >40% of beds unoccupied)
- “Manageable” voids (i.e. 10%-40% of beds unoccupied)
- “Goldilocks” (i.e. <10% of beds unoccupied)
Post COVID-19, asset managers would be foolish to assume that a “Goldilocks” outcome is achievable, with new assets facing either “disastrous” or “manageable” voids at best. This realisation, however basic, and the all-important realigning of expectations around this, is key to making sensible, cautious preparations that ensure you retain control of the situation and avoid a “disastrous” worst case scenario.
Let’s assume as a base case that rental demand from students will be weak; continued travel restrictions preventing any influx of foreign students, universities favouring online over face-to-face teaching and many students consequently deferring their places. The only way to drive revenues from the asset and service its cost base - preventing the landlord from single-handedly shouldering the entire cost of the current market conditions - is to open up it up so that it can be rented out to non-students.
Planning for flexibility: key to optimising your lease-up
Now comes the good news. Local planning authorities are increasingly aware of COVID-19’s impact upon PBSA landlords, and are very open to sensible conversations around how they can be part of a solution. In fact, at Lavanda we have first-hand experience of working with landlords and local authorities to secure the easing of planning restrictions on PBSA assets during their lease-up. The rationale is straightforward:
- Permitting short and medium-term rentals within the building for a limited period ensures maximum utilisation of the asset, whilst ensuring it remains flexible and dedicated for student use in the near-term.
- Student residents can be easily phased in as and when more traditional rental demand appears, and in any event in time for the new academic year starting in September 2021.
- PBSA communities are typically in highly desirable city-centre locations, with perennial demand from short and medium-term guests (both business and leisure travellers) and very strong seasonal peaks.
- Short and medium-term guests are significantly higher spending than student residents, so provide a welcome boost to the local economy at a time when every penny counts.
- The income generated ensures that council tax can be paid, to the benefit of the local council.
- Nobody wants an empty building in the centre of a city.
This flexibility is key to optimising the lease-up phase and ensuring positive Year 1 economics. The easing of planning restrictions to permit non-student occupancy will undoubtedly turn a potentially “disastrous” situation into something that is at least “manageable,” whilst laying the foundations for a possible “goldilocks” outcome.
How will this improve the performance of your asset?
Actual impact can vary wildly from scheme to scheme. Outcomes must be modelled, and are entirely dependent on a) location and b) the strength of seasonal demand. It is certainly not a “one size fits all” affair.
To help you understand the precise impact upon the lease-up of a specific scheme, Lavanda offers PBSA landlords a free and comprehensive “Impact Analysis” to illustrate in granular detail the NOI generated by our optimised solution. We leverage our own technology and data, our experience in overcoming specific challenges and hurdles (like, for example, council tax) and then overlay specialist 3rd party data sets that enable us to model very precise economics for PBSA schemes anywhere in the world with confidence. There are no obligations or strings attached to our Impact Analysis; you are completely free to take it away with you and do whatever you want with it.
If you would like to request an Impact Analysis for your scheme, please contact me directly and I will be delighted to help out.
What happens next?
If you are bringing a PBSA asset to market in the next 12 months, here’s a simple checklist:
- Reset your expectations around what success looks like. This is all about making the best of a bad situation and mitigating downside risk, whilst at the same time laying foundations for a possible upside scenario.
- Get a free “Impact Analysis” from Lavanda. This will inform you as to how the asset can be optimised, as well as set expectations around what’s realistic and achievable in terms of financial performance as the building is leased-up.
- Revisit your lease-up strategy. Once informed of both upside and downside risk factors, update your plan for bringing the new scheme to market. The sooner you start planning, the greater the impact it will have upon performance as the asset can be advertised for longer with note defensible pricing.
- Choose your toolkit. Whether you manage the lease-up yourself in-house, or through a preferred 3rd party operator, you need to make sure they have the right toolkit to ensure success. This includes the ability to tap into short and medium-term rental demand, pricing optimisation tools, and robust cost management and financial planning tools.
Have a suggestion for an area you would like us to explore further in this blog series or have further questions? We welcome your input and are always happy to talk. Contact us on firstname.lastname@example.org. Look out for our next blog as we look into increasing the long-term trading value of PBSA assets.
Lavanda is an award-winning SaaS platform used by the world's leading vacation rental, student and multifamily operators to increase net operating income through short and medium-term rentals. Clients include Greystar, CA Ventures, JLL, Savills and LaSalle amongst others.