Purpose-built student accommodation and renters reform – where do investors stand?

Despite the headwinds that are presently being felt across the real estate sector, the market narrative around the purpose-built student accommodation (PBSA) market has remained largely positive.

Notwithstanding challenges, including a decline in transaction volumes when compared to the recent years, and the cost of funding, investors have pointed to rental growth that in many markets has outstripped inflation, a fundamental lack of supply and a maturing operator landscape as just some of the reasons to be cheerful about the sector's future in the UK.

The draft Renters Reform Bill (the Bill), published in May 2023, marks a significant shift for the living sectors generally, abolishing the Assured Shorthold Tenancy (AST) regime and fixed term tenancies such that all tenancies, with limited exemptions, will become periodic assured tenancies. Consequently, landlords will be unable to obtain possession of their property without a specific "ground" on two months' notice (given by exercising a Section 21 notice) and tenants are only required to give a minimum of two months' notice to end the agreement.

Challenges to PRS student sector

The Bill creates significant uncertainty for investors (and students) in PRS student accommodation. The demise of ASTs will lead to significant practical implications for both PRS landlords and students. Both landlords and students want certainty over tenancy start and end dates. The Bill's proposals will make it challenging for certainty to be given in relation to future start dates which will likely be unappealing for students and landlords and could even impact landlords' rental stream if they are unable to achieve back-to-back tenancies. This, along with students' ability to terminate their tenancy agreements on two months' notice, raises a real risk of significant void periods arising for landlords. Landlords may be unable to fill these voids with other students part way through academic years, and/or in order to minimise lost rental income they may look to rent rooms to non-students, resulting in an increase in mixed-tenant homes.

PRS student homes are already reportedly facing an exodus of landlords due to recent tax changes and it has been widely reported that the changes brought in by the Bill may lead to even more leaving the student rental market if landlords in England and Wales react in a similar way to those in Scotland, following the implementation of the Private Housing (Tenancies) (Scotland) Act 2016. Although Rishi Sunak recently announced the proposed scrapping of increased energy efficiency requirements for landlords from 2030 in the context of residential property, it is unlikely that this will offset the challenges faced by PRS student housing.

The proposal to do away with fixed term tenancy agreements will bring the student lettings market in line with the rest of the PRS. However, this does not align with how the student housing market works in practice, in which students generally live in halls or PBSA under a fixed term tenancy for one academic year or up to 12 months before then "switching" to live in PRS accommodation (often in Houses of Multiple Occupation).

In February 2023, the House of Commons highlighted that not exempting PRS student homes from the Bill would increase rent prices or reduce availability of PRS student homes. We will therefore need to wait and see whether any changes to the current proposals are forthcoming.

The PBSA exemption

In considering the impact of the Bill for the student accommodation sector, however, it is important to highlight that PBSA is expected to be exempt from these changes as long as the provider is registered for government-approved codes. This exemption applies on the basis that such tenancies are not "assured." The Government has also reasoned the exemption of PBSA from the regime as it is "clearly defined, tenants do not have an expectation of the accommodation providing a long-term home, and robust rules to maintain standards already exist."

Therefore, it will remain possible to let PBSA on fixed-term tenancies. The Bill seeks to reflect the statement made in the 2022 Government White Paper "A Fairer Private Rented Sector" (the White Paper) that:

"It is important that students have the same opportunity to live in a secure home and challenge poor standards as others in the PRS. Therefore, students renting in the general private rental market will be included within the reforms, maintaining consistency across the PRS. We recognise, however, that Purpose-Built Student Accommodation cannot typically be let to non-students, and we will exempt these properties - with tenancies instead governed by the Protection from Eviction Act 1977".

Not only will this mean that PBSA landlords will continue to have predictable tenancy duration and income, but also that they retain the flexibility to use premises during "void" periods, such as during summer holidays, for alternative uses (the example given in the explanatory notes to the Bill is the use of accommodation for conference guests) with the certainty that the premises will be vacated and available for the start of the next academic term.

Scope for further changes?

Given that the Bill is at such an early stage (its second reading took place on 23 October 2023) it is possible that it will be subject to further amendment as it passes through parliament. It is anticipated that there may be calls to tighten the exemption, however, there is no indication, as yet, that any amendment to the PBSA exemption is to be tabled.

In a letter to Felicity Buchan MP, Parliamentary Under Secretary of State on 24 January 2023 a number of institutions, such as the NRLA, and universities suggested that student landlords should be able to give two months' notice, during the final two months of a tenancy agreement or at the tenth month of a 12-month fixed term, to repossess a property when it is needed for incoming students. It is unclear whether or not this proposal is under consideration, but it is expected that the point will be raised in parliamentary discussions as the Bill progresses.

Respondents to an inquiry into proposals set out in the White Paper suggested that "all student housing should be exempt from the tenancy reforms." In June 2023, the Minister of State (DLUHC), responded to a written question as to whether or not an assessment would be carried out by the Government into the "potential merits" of extending the exemption to include all student accommodation (not just PBSA). In her response, Rachel Maclean MP stated that the Government recognised the annual lettings cycle were "are considering solutions, such as a ground for possession that enables landlords to guarantee vacant possession for next year's tenants" however, she also cautioned that "any solution needs to balance the needs of both students and landlords." In its response¹ to the Levelling-up Housing and Communities Committee's Fifth Report of Session 2022-23, published on 20 October 2023, the Government confirmed that it would introduce a new ground for possession "that will facilitate the yearly cycle of short-term student tenancies" which will "enable new students to sign up to a property in advance, safe in the knowledge they will have somewhere to live the next year." The Government has acknowledged the cyclical nature of the student market and how critical it is to landlord business that possession can be guaranteed each year for a new cohort of students. This proposal has already drawn criticism from some, including Paul Blomfield MP who commented that "a one-size-fits-all approach will not address the fact that not all students want properties that are cyclical with the standard undergraduate year...we need a clear definition of a student and how grounds for possession will be implemented."

Indeed, the Government has stopped short of broadening the PBSA exemption across the piece notwithstanding the recommendation of the Committee to retain fixed-term contracts in the student PRS, which stated that "not exempting the student PRS could push up rents or reduce the availability of student rental properties, at a time when the market in many university towns and cities is already very tight."

Opportunities for PBSA?

Pre-leasing and high occupancy rates have traditionally made PBSA an attractive asset class and the current challenges faced by PRS student housing may further increase opportunities for PBSA.

• Greater certainty: there is little doubt that finding accommodation can be a stressful process for students. The proposed reforms may push students towards PBSA in order to ensure they are able to secure accommodation for their next academic year in good time. Greater security for students may make PBSA the more attractive option when deciding whether or not to explore the PRS alternative.
• Housing shortage: the shortage of student housing as supply has failed to keep up with demand will only worsen if the availability of PRS student accommodation depletes further. In August 2023 the Telegraph reported that the departure of landlords from the market had left almost a quarter of a million students without a room. PBSA is likely therefore to remain in demand given the certainty it is able to offer students. The reason given for the PBSA exemption is that it cannot typically be let to non-students whereas the PRS market is able to pivot and rent to a broader range of tenant. It is possible therefore that this will increase the private rental accommodation available to the wider market.
• Increasing demand: recent UCAS projections have indicated there are currently 2.2m full-time students in the UK, equivalent to around three students per available bed in purpose-built student accommodation. UCAS, in partnership with Knight Frank and Unite Students, is highlighting that in 2030 there could be a million higher education applicants in a single cycle - a quarter of a million higher than today, and double the numbers seen in 2006.
• Costs to students: although PBSA has traditionally been seen as more expensive option, a study by Knight Frank in 2022 highlighted that when additional costs such as utilities are taken into consideration, PBSA offers a more cost-effective option for students when compared to PRS. With rising rents and other financial pressures on students, PBSA has the potential to become an increasingly attractive option to students.
• Net zero: the green credentials of PBSA and the ambition to achieve net zero in all PBSA buildings by 2050 may be an attractive option to students who have been vocal in their concerns about climate change.

Potential issues arising from the PBSA exemption

• Circumventing the provisions: although the reason for introducing the PBSA exemption is that such accommodation has a closed market (i.e. can only be let to students) there are some concerns that the PBSA exemption might be exploited by unscrupulous PRS landlords choosing to rent PBSA to non-students and avoiding the effect of the Bill. The Government has been encouraged to consider proposals to combat this, such as the introduction of financial penalties and requiring all PRS landlords who let to students to sign up to a national code of conduct. As with any such deterrents their efficacy relies on proper enforcement and monitoring. The Bill introduces a landlord redress scheme through which tenants can make complaints against members of the scheme which would be subject to independent investigation and determination. The Bill also establishes a PRS database which will contain details of residential landlords and their dwellings. The explanatory notes to the Bill indicate that it is the Government's intention to define the scope of the PRS database and landlord redress scheme through secondary legislation as soon as possible after the Bill passes into law. The intention is for such regulations to "include, exclude or make special arrangements for niche tenures such as purpose-built student accommodation." We do not currently have further details as to the impact of such provision on PBSA, however, the explanatory notes indicate that in the future the Government may expand or reduce the tenancies that are required to register on the database and/or with a redress scheme.
• Dual market: there are concerns that a dual market will emerge in the UK between PRS student accommodation and PBSA, as a result of these reforms. Many would argue that given the levels of demand for student accommodation in the UK market, policy and regulation should be supporting both types of landlord to prevent the overall levels of student housing supply diminishing.
• Tenant choice and affordability: the proposals have also drawn criticism on the basis that PRS landlords would be deterred from entering the student lettings market and student choice would effectively be eroded with PBSA becoming the only realistic option, therefore creating a competitive advantage over PRS student accommodation. Key to this criticism is the question of affordability; as costs of living increase students need rent to be economical. Given that rental rate increases prove attractive to PBSA investors a balance will need to be struck to ensure that student options are not diminished and accommodation remains accessible. Failure to achieve this may cause students to turn to traditional PRS/HMO arrangements, despite the lack of security of tenure, on grounds of cost effectiveness. However, this assumes a ready supply of alternative accommodation which may not be realisable; 48% of private landlord respondents to the English Private Landlord Survey (2021) said that they would be unwilling to let to students. Rather than ensuring tenant protections the effect of the Bill may result in a two-tier student market with some being able to access greater statutory protections and better quality accommodation than others.²
• Security: the fixed term nature of PBSA tenancies often results in early sign-up whereby all tenancies will be filled months in advance of the academic year in which students require the accommodation. This offers investors/landlords income security but can prove difficult for students who are required to commit part way through an academic year, during a time when they are establishing working and travel patterns, and are not yet in a position to properly consider their future accommodation requirements. Students may opt to avoid the "rush" to secure PBSA accommodation and may consider PRS student accommodation which traditionally has offered a greater degree of independence with tenants able to select their housemates and establish more permanent lodging arrangements for their second, third and fourth years.

Conclusion

The carving out of PBSA from the Renters Reform Bill creates different legal parameters for PRS student landlords and PBSA landlords and in doing so, risks creating a "dual market" in the UK student accommodation sector. Should further PRS student landlords exit the market as a result, this has the potential to exacerbate an already significant supply problem.

From the perspective of the PBSA sector and investors however, if the exemption filters through as anticipated, the Bill is likely to be regarded as a positive development, demonstrating a clear backing for the sector from a policy perspective and providing certainty that PBSA investors may continue with existing operating models when conducting their lettings activity.

Legislative change, however, is only one of a number of challenges facing the student accommodation sector. There are multiple tension points that the market is presently grappling with, such as meeting the increasing demand from a position of undersupply and balancing the ability to achieve rental growth with affordability considerations. As with the broader real estate market, landlords, investors and developers are also finding themselves squeezed by high interest rates, making the cost of delivering new product to the market challenging, however good the operational fundamentals may be on the ground.

¹ Reforming the Private Rented Sector: Government's response to the Committee's Fifth Report of Session 2022-23

² Paragraph 11b of the Explanatory Notes to the Bill: "The private rented sector has a higher proportion of properties that do not meet standard than other housing tenures", on this basis the Bill proposed that privately rented homes will need to meet a Decent Homes Standard.