How to maximize your PBSA assets: part 4 - Boosting the long-term trading value
June 24, 2020
In this next post in our series analysing the challenges and opportunities facing PBSA landlords, we take a look at defensive strategies to optimise the long-term trading value of student housing assets.
- 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
PBSA contingency planning ahead of an economic downturn
According to a recent Cushman & Wakefield report, 87% of student accommodation in the UK is now delivered through the private sector. With demand continually outstripping supply (pre-COVID-19 at least), it’s unsurprising that institutional investors have piled into the sector seeking to capitalise on a growth market. Not only has PBSA been a perennially robust asset class, there’s also been a steady shift in demand as students have increasingly come to expect higher spec, better serviced, more functional accommodation. A perfect backdrop for opportunistic investors to differentiate and add value. Happy days.
But that was then. In the wake of COVID-19 the student housing sector faces major challenges and a prolonged period of uncertainty - in all likelihood stretching well into the next academic year. Over the next 12-18 months established portfolios look set to come under unprecedented pressure as the pandemic takes its toll on the global economy, putting the underlying business models of investors to the ultimate test. There is strong sentiment, which we subscribe to internally, that the economic impact we’ve seen to date from COVID-19 is just the tip of the iceberg.
Savvy PBSA investors are already thinking two steps ahead and making contingency plans. They’re not only working to ensure they have an agreed exit strategy in the event of a worst case scenario, they’re laying the groundwork now to ensure their portfolio is fully optimised to command the highest possible value and cap rate in the event of a potential transaction.
This is an opportunity that has not escaped the attention of technology entrepreneurs seeking to create new value. Consequently, a new toolkit exists to optimise portfolio performance and valuation by powering demonstrable and predictable new revenue streams. Moreover, COVID-19 is in many ways a catalyst that is forcing this technology into the mainstream and embedding it into the “new normal” for landlords and operators.
Step 1: Securing flexible use
With students being released from their tenancy agreements, vacant PBSA communities are now a painful reality. Moreover, the outlook for the year ahead remains bleak at best. Landlords are consequently seeking recourse; engaging with their local authorities to secure consent for more flexible residential use within PBSA schemes in order to stem their exposure to the pandemic. Local authorities are proving to be understanding and supportive of the context, and keen to be part of a solution.
The pandemic is forcing local governments to understand the business case for more flexible use across residential asset classes, leading to new planning precedents being created at a previously unforeseen pace. Why is this important? Permission for more flexible use beyond purely student occupation makes for a far more defensible asset, and maximises its value in the event of a transaction.
Step 2: NOI optimisation
Where permission for flexible use can be secured, the next step is to look at maximising NOI. At present, in the face of such uncertain demand, there’s little scope to optimise term time rents - but that’s also ok as there are robust precedents from the “pre-COVID era” that can be referenced in the event of a “worst case scenario” transaction.
The greatest potential for value creation right now is to maximise NOI outside of traditional term time, and specifically tap into short and medium-term rental channels to maximise revenues over the Summer seasonal peak. This has a dual benefit:
- This generates income from your currently vacant units.
- Short-term rental income is highly seasonal, but it is predictable over the longer-term. Income generated in today’s exceptional market conditions will demonstrate a very credible base case for future non-term time revenues - with plenty of upside potential.
Earlier in this series we’ve offered guidance and advice around how to optimise the Summer months, leveraging dynamic pricing and automating core operations. Dynamic pricing optimisation alone can boost NOI by up to 40% - directly driving up the cap rate. Most importantly of all, it’s not too late to get started for Summer 2020.
It pays to be cautious...
At Lavanda we live by a single mantra: “prepare for the worst and hope for the best.” With all evidence pointing to the fact that worse is yet to come, it is only prudent to make hard decisions fast, and accelerate the launch of initiatives that can provide a crucial crash pad if and when they are actually needed. Laying groundwork now for a possible exit in the next 12-24 months, even if not the preferred strategy, is a sensible precaution to mitigate any downside risk resulting from the pandemic.
Have further questions, or maybe a suggestion for a topic or theme that you would like us to explore further in a blog series? We are always happy to talk, and welcome your input. Please reach out to us on firstname.lastname@example.org.
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.