Planning considerations for student accommodation

• 1 October 2024
• News

Whilst student accommodation is fundamentally residential in nature, the use and occupation of student properties generates differing material considerations from a planning perspective. As a result, local authorities in areas with high numbers of student residents will often adopt specific planning policies to control the development of student accommodation, including the location and number of units.

Planning issues which often arise in relation to student accommodation include use classes, temporary use of accommodation, affordable student accommodation and flexibility in the use of the accommodation outside of term times. Politically, the growing cost of student accommodation is becoming a serious issue.

Affordable student accommodation

The London Plan 2021 introduced policies to try and address issues around affordability, with a number of Boroughs following suit at a local level. Policy H15 of the London Plan entrenched the concept of affordable student accommodation which many local planning authorities in London are seeking to build on. We expect policies relating to affordable student accommodation to continue to develop across the country, and in scope and complexity.

The definition of affordable student accommodation for the purposes of the London Plan refers to purpose built student accommodation that is provided at a rental cost for the academic year equal to or below 55% of the maximum income that a new full-time student studying in London (and living away from home) could receive from the Government’s maintenance loan for living costs for that academic year. It is important to understand this requirement at the outset of a proposed development, particularly from a viability and delivery perspective.

Many London Boroughs have their own policies in relation to affordable student accommodation and the specific proportion of units which will need to be provided as affordable accommodation. Policy H15 of the London Plan refers to the ‘majority’ of bedrooms in a student development being secured by a nominations agreement. In some instances, there may be a disconnect between this policy and the applicable policy of the relevant London Borough. It will therefore be important to engage with the position as early as possible in the planning process to understand the mix of accommodation tenures that will need to be delivered.

Planning agreements will be used to secure provisions to ensure affordable student accommodation is available to those who need it, via a nominations agreement (where required). Some individual Boroughs will however have different requirements, potentially over and above the London Plan. The level of flexibility in relation to the private units will inevitably be key to viability and consequentially the attractiveness to investors.

Other articles in this series

• Looking at the student accommodation sector
• PBSA and Building Safety Act
• HMO licenses, student accommodation and the hidden conditions
• The Renters (Reform) Bill
• Rent control
• VAT considerations

The Renters (Reform) Bill and its impact on student accommodation

• 1 October 2024
• News

Last week a group of 30 charities and non-profit organisations have written to the prime minister to call on the government to commit to progressing the Renters (Reform) Bill. They are primarily concerned with banning “no-fault” evictions i.e. the right for landlords to evict tenants on two months’ notice for no reason. The way the Bill seeks to achieve this is to abolish the Assured Shorthold Tenancy (AST) regime and instead all tenancies will become periodic assured tenancies, rolling monthly without a specified end date. Tenants will need to provide two months’ notice when ending a tenancy and landlords will only be able to evict a tenant under “reasonable” circumstances.

The explanatory notes published alongside the Bill stated that Purpose-Built Student Accommodation (PBSA) will be exempt from these changes as long as the provider is registered for government-approved codes. However the Bill itself doesn’t include such an exemption, so what does this mean for PBSA? Currently there are no details on how the exemption will apply in practice and whether these government-approved codes will include or be limited to existing ANUK/ UUK/ Unipol accreditation schemes for student accommodation providers.

It is worth noting that under the current assured tenancy regime there is an exemption for student lettings provided that the tenancy is granted to the student either by the educational institution delivering their course of study or by another specified institution or body of persons. So generally universities/ publicly funded higher education institutions and private registered providers of social housing are exempt from the assured tenancy regime. These tenancies will continue to be exempt and will not be affected by the Renters (Reform) Bill.

However, student accommodation which is not owned by educational institutions may be affected by the Renters (Reform) Bill. Companies which own these schemes may have a nominations arrangement with an educational institution to guarantee an agreed rental rate but it is the company which grant ASTs directly to students. The owners of these direct let assets will consequently be affected by the Renters (Reform) Bill unless they are able to register for a government-approved code and therefore benefit from the PBSA exemption.

Whilst there is uncertainty over whether there is an exemption for direct let PBSA and what that possible exemption may look like, there isn’t even a hint of an exemption for HMOs as per the Bill’s current drafting. In the Government’s White Paper, A Fairer Private Rented Sector (June 2022), it was stated that “students renting in the general private rental market will be included within the reforms”, the difference between HMOs and PBSA being that PBSA “cannot typically be let to nonstudents”. However, HMOs also rely on students renting property at specific times of the year to align with term dates and students sign up for tenancies months in advance so landlords need to obtain vacant possession at the end of each fixed term tenancy.

Landlords also rely on having student tenants in place for the entire fixed term as it is difficult (if not impossible) to find new tenants partway through an academic year so the ability for tenants to vacate at any time on two months’ notice could be disastrous for landlords.

Whether it’s the uncertainty caused by the undetailed promise of an exemption for direct let PBSA or the effects of the reforms on landlords in the HMO market, the Renters Rights Bill could impact the confidence of investors in elements of the student accommodation sector. This could further reduce the already stretched supply, which will consequently push up increasingly unaffordable rents and add to the emerging two-tier standard of student accommodation.

It is therefore hoped that the Bill will be amended on the second reading to allow the fixed-term model of renting to continue for all student lets.

More articles in this series:

• Looking at the student accommodation sector
• PBSA and Building Safety Act
• Planning consideration for student accommodation
• HMO licenses, student accommodation and the hidden conditions
• Rent control
• VAT considerations

Student Accommodation Conference 2024: rent control

• 1 October 2024
• News

Ronan Ledwidge, Partner and Head of Student Accommodation, and I recently attended the Student Accommodation Conference at The Intercontinental Hotel, where we heard from many interesting and insightful speakers. We heard about the speakers’ predictions for the PBSA sector in the next few years, what the current challenges are in the market and how the new building regulations have affected these.

One talk in particular was very topical, about the impact of the recent rental reforms on the student housing sector. Another proposed reform that has been the centre of many political discussions is rent control; but is this likely to impact the student housing market?

In short, there seems to be no real political appetite for introducing rent controls. The Shadow Housing Secretary Lisa Nandy has said that “housebuilding is falling off a cliff” and rent controls will only work to “leave others homeless”, meaning it is providing no solutions to the problems in the housing market. It therefore seems very unlikely that rent controls will form any part of a national housing policy.

Rent controls were first proposed because the cost of living crisis means that paying rent is becoming increasingly hard for many, especially when rent prices are inflating. Within the student accommodation sector, the National Union of Students had called for rent controls due to a shortage of quality affordable student housing. But, it seems that this is no longer the answer to the problem raised.

So, why have the plans for rent control been dropped?

Investment in new housing stock was of key concern, with there being fears that investors would not want to take on new housing projects if they could not sufficiently recoup their investment. If investors lose interest in the housing market, then less houses will be built and there would be a shortfall in supply against the increasing demand for private rented housing. Within the Purpose Built Student Accommodation sector (PBSA) specifically, if rent controls reduce profitability, then sales of PBSA may decrease and investors may move to a different sector; this would compound the already pressing problem of student accommodation shortages.

Rent control is also an issue for the upkeep of current student accommodation buildings as owners won’t have the capital to maintain their stock; this could lead to a worsening in the quality of student accommodation. This affects both the students living there and the investors who may see a reduction in the value of their assets.

Finally, past experience has shown that rent controls do not help the housing market. When the Housing Act 1988 lifted controls on short term lettings, there was a growth in the rental sector market. So, why would a political party impose rent controls and stifle the market that needs more investment? The takeaway from the student accommodation sector is that investors should not be encouraged to leave a market where an increase in supply is desperately needed.

What does this mean for investors?

Rent controls do not seem to pose any immediate concerns as the political pressure for rent controls seems to have been dropped for now. So, incentivisation for investors in the PBSA market continue, with rent prices not being an issue regarding the profitability of building and maintaining these assets.

More articles in this series:

• Looking at the student accommodation sector
• PBSA and Building Safety Act
• Planning consideration for student accommodation
• HMO licenses, student accommodation and the hidden conditions
• The Renters (Reform) Bill
• VAT considerations

Looking at the student accommodation sector

• 1 October 2024
• News

Student accommodation has proven to be a resilient sector in recent years even as other investment markets have struggled. Despite the challenges arising from varying factors such as the difficulty in obtaining planning consent for suitable sites and economic factors such as interest rate rises and construction cost inflation, it is a sector that still attracts a great deal of interest from both the domestic and international investment communities. This is largely driven by a surge in demand that continues to out-strip supply (and seemingly will for the foreseeable future).

Our Student Accommodation Sector Group has been busy since the start of the year. We’re proud to have acted for a variety of clients on a wide range of transactions. Representative examples include advising:

• International investor Far East Orchard on the purchase of a stabilised investment known as Emily Davies House, Southampton.
• Developer/contractor HG Living on the forward funding of a new 350-bed student accommodation scheme in the heart of Newcastle-upon-Tyne.
• Singapore-headquartered private equity firm Q Investment Partners on the land acquisition (by means of acquisition of the corporate land-owning vehicle) and formation of a joint venture with Hurlington Capital to develop a new student accommodation site in Woolwich, London. 

In the following weeks, we will explore and share with you some of the legal and topical issues we are encountering. In particular, you will hear from us on:

• Building safety – Construction Counsel, Richard Spring, will take a look at some of the issues arising from the Building Safety Act.
• Planning – Planning Associate, Sophie Smith, will discuss various planning issues but perhaps the most topical is requirements on affordable student accommodation.
• Residential considerations – Commercial Real Estate Partner, Anthony Goodmaker, and Commercial Real Estate Senior Associate, Nicola Copsey will take a look at HMOs, AST reform and rent controls.
• Tax – Tax Partner, Heather Corben, takes us through the complex SDLT and VAT treatment of various types of accommodation as they relate to constructing, selling, or buying and owning student accommodation.

If you would like advice on anything covered in our upcoming series, please get in touch with a member of the Forsters Student Accommodation Team.

Other articles in this series:

• PBSA and Building Safety Act
• Planning consideration for student accommodation
• HMO licenses, student accommodation and the hidden conditions
• The Renters (Reform) Bill
• Rent control
• VAT considerations

HMO licences, student accommodation and the hidden conditions we need to know about

• 1 October 2024
• News

Houses in Multiple Occupation (HMOs) are a complex and often overlooked area of law, but they can be a key factor in operating student accommodation. Generally they arise where more than 2 people live together who are not part of the same family, and they share common facilities like a kitchen, toilet or bathroom. All HMOs need a specific licence if they are occupied by more than 4 people, and local authorities are also able to set their own rules for when other types of HMO may require a licence.

Student accommodation often takes the form of an HMO, be it a shared student house, or a new-build cluster flat in a purpose-built student accommodation (PBSA) tower. And whilst checking the HMO licence position might not be at the top of a student’s checklist when choosing their term-time home, investors, funders and lenders in the student accommodation sector are becoming increasingly aware of the need to get the licensing piece right.

As well as an HMO licence specifying the maximum number of occupants each “house” may contain, they also have an expiry date and are personal to the then current licence holder. They cannot be transferred to a purchaser on the sale of the property and a new owner will need to make an application for a new licence or licences.

Failure to have a valid HMO licence is a criminal offence and subject to an unlimited fine, albeit there is a defence where a valid application for a new licence has been made but the licence is yet to be granted.

But automatic renewal of HMO licences is not a given, and equally there is no guarantee that a new owner would be granted a new licence either. HMO licences can be granted subject to conditions (e.g. to carry out works) requiring compliance by a fixed date.

On a recent PBSA acquisition we were involved in, the vendor’s HMO licences for a number of cluster flats in a PBSA block were granted subject to conditions requiring fire safety works to be carried out by a deadline that had already passed. The concern for the purchaser was that this breach may impact the ability to procure new licences, or that if new licences were granted the timeframe for completion of the works to be imposed on the buyer by the new licences would be unachievable.

The fact that no enforcement action had been taken to date was of little comfort given that the issue would be brought to light by the buyer’s unavoidable application to the local authority for new HMO licences following acquisition. Accordingly, the vendor had no alternative but to carry out the necessary fire safety works required to comply with the conditions in the HMO licences as a condition of the sale completing.

This example highlights the need for owners and operators of student accommodation to stay on top of the requirements in their HMO licences as part of the ongoing building management process, especially if the property is being prepared for sale. And whilst the sector is more wary than ever of their fire safety obligations, thanks to the Building Safety Act 2022, it can often be overlooked how the HMO licensing regime can also impose statutory obligations on owners and operators of student accommodation.

More articles in this series:

• Looking at the student accommodation sector
• PBSA and Building Safety Act
• Planning consideration for student accommodation
• The Renters (Reform) Bill
• Rent control
• VAT considerations

VAT considerations in the student accommodation sector

• 1 October 2024
• News

It is important to get the VAT treatment right in relation to student accommodation to prevent irrecoverable VAT being incurred; otherwise, it will be a real cost in relation to the project.

Letting to students is normally an exempt supply so, when student accommodation is being constructed, care has to be taken to ensure that a zero-rated supply can be made which should then enable VAT which has been incurred to be recovered.

The type of zero-rated supply that can be made (to allow the recovery of VAT) will depend on whether the student accommodation being constructed can qualify as dwellings or whether the more restrictive rules applying to “relevant residential purpose” (“RRP”) buildings have to be relied upon.

Most student accommodation which is being constructed these days will qualify as dwellings as investors and private operators generally build studios and cluster flats which each have en-suite bathrooms and kitchen facilities. This contrasts with traditional halls of residence which typically only qualify for zero rating if they satisfy the RRP conditions.

Where dwellings are constructed, the developer should benefit from receiving zero rated supplies from the building contractors so that VAT at the standard rate in relation to the construction should only be incurred on fees such as those paid to architects and surveyors and in relation to white goods. However, the developer may have to pay VAT to acquire the site in the first place and this VAT and VAT on fees of architects and surveyors (and similar services, but not white goods) can be recovered provided the developer sells or grants a long lease of the completed development to, for example, a university.

If instead the developer plans to operate the student accommodation itself, it will need to grant a long lease (which can be zero rated) to another company in its group which will operate the student accommodation, so enabling the developer to recover the VAT it has incurred.

If the dwellings conditions cannot be satisfied, the developer may have to pay VAT on the construction costs (unless it is going to operate the student accommodation itself) and so it will be even more important that it is able to make a zero-rated grant to the operator/tenant following completion of the project. For the sale or grant of a long lease to be zero rated, in these circumstances, the tenant will need to provide a certificate to the developer confirming that the building is going to be used for a RRP. If the developer plans to operate the student accommodation itself, rather than granting a long lease to a third-party operator, some further planning will be required.

Complex VAT issues can arise (under both the dwellings and RRP regimes) where amenities, in addition to the accommodation itself, are being constructed, since these amenities may not qualify for zero- rating. RRP treatment can be more generous than for dwellings in relation to some amenities. Dining rooms and laundry facilities may well qualify for zero rating treatment under the RRP regime if built at the same time as the accommodation, but staff offices, bars and shops are unlikely to do so, potentially resulting in irrecoverable VAT for the operator.

In order to qualify for RRP treatment the accommodation must be intended “solely“( at least 95%) for students. Summer letting of the accommodation for conferences can be a useful source of revenue. However, using the accommodation for more than 2 weeks each year for non–students could cause RRP relief being lost so, in general, it is better to qualify for dwellings relief since that relief does not impose the same “looking forward “restrictions.

This is not the end of the story. Other adjustments to the amount of VAT initially recovered may need to be made in some circumstances. For example, if an operating lease is surrendered in the first 10 years and the landlord starts to lease direct to students, or, if an RRP certificate has been given by an operator which incurred construction costs itself and the use of the building changes over a 10-year period, the benefit of zero- rating may be partially clawed back.

Care needs to be taken therefore both in relation to the initial structuring and when reviewing the impact of possible future events.

More articles in this series:

• Looking at the student accommodation sector
• PBSA and Building Safety Act
• Planning consideration for student accommodation
• HMO licenses, student accommodation and the hidden conditions
• The Renters (Reform) Bill
• Rent control