Written by Matthew Yassin
The PBSA market has recently seen fundamental changes in the way it is being viewed by lenders and institutions alike. It was traditionally viewed as an attractive long-term investment and there were many options for the developer to consider, forward fund/purchase, development finance or joint venture. We have seen institutions withdrawing from the market because of the lack of confidence in the demand section of the chain. A concern is that there may be an oversupply of PBSA beds within the market. Some of the points of contention are: How many UK and overseas students will take up the new supply of beds? Will they want to travel in this climate? Is current government advice prohibiting people from making decisions? Will there be a long term rise in online learning? The concern is that the demand will not meet supply considering PBSA is heavily reliant on overseas student and physical attendance, inevitably affecting their revenue streams.
From a lenders perspective, many investment grade funds and commercial banks are also re weighting their balance sheets to correct their desired exposure to this market. This is based on the existing threats listed above. Developers risk has previously been reduced by mechanisms such as forward fund from institutions or nomination agreements and leases from universities.
What does this actually mean? Lending is underwritten on various factors of risk. Without forward funding and guaranteed future income from a lease, the credit risk significantly increases. The developers will have to build out the scheme with no clear exit or guaranteed income. Underwriting a loan and assessing the risk of the scheme will mean that more emphasis will be on the letting operation and management of the building on completion. Direct lets are speculative when looking at the value of a scheme and inevitably result in more stringent underwriting on end values. To realise the full value of the transaction, a longer stabilisation period will need to be considered.
To offset risk, credit teams are now looking for Section 73 planning amendments to allow the scheme to be presented as a multi-use scheme. Co-living is a good alternative use for this type of asset. This produces a second valuation in case the issues within the PBSA market materialise. Other important factors that are being more highly scrutinised are the fundamentals within the deal. Is the university part of the Russell Group? What is the financial strength of the University? What are the specialisms and do they require physical attendance? And finally, what is the ratio of students using HMOs vs PBSA within a location. If the former outweighs the latter, there is a material shortfall which will improve the risk for credit.
Whilst liquidity within the sector is currently low, we have seen fresh liquidity entering the market through specialist funds. These funds have PBSA expertise that can underwrite a deal on a granular level rather than a blanket approach on the sector. This matter is constantly evolving and it is certainly a more creative market but for the right deal there is still funding available.
Read the full article in Buisness Moneyfacts here.