Sue Churchill, Director of Nottingham-based architecture firm Church Lukas discusses the challenges facing the PBSA sector when responding to calls for more affordable student housing.
GSL News: Can you give us an overview of your experience in the purpose-built student accommodation sector?
I’m a Director with Church Lukas. We’re architects who do a lot of work in the student accommodation space. I’ve been in the sector for more years than I would be happy to admit, really, but right from university it was a sector that I got heavily involved with. I worked with UPP in their early days when they were still Jarvis Projects, and my career very much followed the way that student accommodation developed through the various generations and the various models. We’ve worked with people in the sector under a range of different models – partnership models, investor models, developer models, and on a range of different schemes that we’ve seen through bid processes and feasibility studies and all the rest of it. I think it’s fair to say that we understand the challenges and opportunities in the sector – and that the challenges have never been as extreme as they are today.
For me, one of the greatest things about working in the sector is the opportunity to positively influence people at the point where they’re making that transition from dependent to independent living. I think it’s an amazing opportunity to put people in a good place while designing something that balances the student experience within the commercial parameters. Clearly, PBSA is an investment-driven model. But I don’t believe that that’s an excuse to do things on the cheap. I think it is an opportunity to make smart investments and make decent returns, whilst still making a positive difference.
GSL News: In recent times, there has been much talk about the cost-of-living crisis and the need to develop more affordable housing solutions within the PBSA sector. Solutions have been floated around ways to make PBSA more affordable, such as reducing bedroom sizes and amenities. What are your thoughts on this issue?
I think variety in the sector is really important, but I do worry that we’re looking for a silver bullet solution to affordability, perhaps in the wrong place. I think we’ve got to be mindful that we’ve got conflicting priorities, and there are certain external factors that are challenging previous efficiency levels. For example, the approach to staircases and, in general, the compliance side. I am not suggesting for one second that we shouldn’t be providing the safest buildings for our students, but I think regulatory compliance is having an impact on building efficiency without always increasing safety. That is a huge challenge for the sector.
The problem is that we are used to looking at net-to-gross ratios and the gross internal area (GIA) per room, and those metrics that are second nature to us. Those figures have also increased as schemes have become over-amenitised. Sometimes this is driven by what the investors want, and sometimes it is driven by external policies like Glasgow’s requirements for a certain amount of amenity per room, planning processes and the flight to perceived quality.
The reason I think that we’re looking in the wrong place for a solution to affordability is that I think a lot of people are talking about the principle of mini rooms. If I go back around 10-15 years and think about some of the work that operators were doing looking at shared bathrooms and the sorts of metrics required to try to make rooms more compact. When you start to drive that all the way through, the cost parameters, the savings, and the final capital costs don’t align with the reduction in rent that a student would expect for, say, not having an ensuite room. So, you might make small savings in area, but you don’t actually make substantial reductions that would take £20-30 a week off the rent.
The problem that we have is you still need a hall manager. You still need infrastructure coming into the building. You still need to provide Wi-Fi, and you will still need to provide health and safety packs. You still need to provide all these other things. They don’t reduce just because a room is a bit smaller. The fixed costs are going to be there.
If we are sitting with a contractor client, if a scheme has gone through a Design Build Finance Operate (DBFO) process, and we’re trying to “shrink-wrap” a project, you often find that the savings you are trying to identify in one area increase the cost somewhere else.
I think one of the biggest areas we need to look at is the cost of risk. We regularly see substantial risk costs being included within a contractor’s price. We know that these costs can be reduced substantially with a fairer allocation of risk – or often, just a bit more upfront design development. But there is such a desire to simply pass the risk on rather than mitigate smartly – and that impacts the price.
Understandably, a contractor is going to include a certain amount of that money in their cost. If someone could say that risk doesn’t sit 100% with a contractor and maybe it’s a shared risk, then that cost is going to come down.
The other element that I think is also an important area to look at is the fact that the asset trades regularly through its cycle. So if you look at stabilization, and you look at the asset being refinanced in three years, the amount of money that comes out of the appraisal – for example, the cost of someone introducing an opportunity to somebody else – and you consider what that actually equates to in terms of the rent per week, the amount is massive.
I think there are many hidden costs in the industry that we need to be brave enough to interrogate. I see this as a pie chart. If the pie chart is how much the weekly rent is, if we look across the whole asset cycle and across the whole investment cycle. How much is actually associated with each bit? How much is the land cost? How much is related to section 106? How much of the rent is related to the cost of financing and refinancing? How much of it is operational, and how much of it is energy? Until we actually understand what makes up the weekly rent, my personal view is that we won’t actually know where to look for those solutions. Look at what happened with the Olympic cycling team when we won every medal under the sun at one of the Olympics. The UK team was successful because it looked for tiny improvements in everything. That’s what I think we need to aim for in PBSA – for small improvements across the board, but in a way which is joined up and coordinated, to have that open discussion about the cost and allocation of risk and about the futureproofing of an asset and whether that has or doesn’t have a value.
We also need to remove some of the barriers to people doing things differently. We often do the same thing day in and day out. Not exclusively, but generally, it will be the typical five to eight-bed cluster. We know from student feedback that they don’t want that, but that’s what the valuers will value at the highest figure. We have to be honest that this is an investment product here. With valuations being based on market transaction evidence, how can we change the way that the valuers look at things? They are the people who are influencing the decisions on products and need to proactively lead the change, So let’s start talking to the people doing valuations. If there is more of a blended approach, is there a different yield applied to what might be a slightly more future-proofed asset than something which is run of the mill? I think at the moment, if you put out a product that was a bit different, the chances are that a valuer would apply a lower value to it because they’re not familiar with it. So how do we change this? I like to use the analogy that we didn’t know that we needed a mobile phone until it was invented. Now everyone values the mobile phone. How to change the industry from this point of view is a massive challenge – and it’s not going to be solved by taking 300 millimetres the width of a room and then saying it’s affordable! That is not where the issues are.
GSL News: If someone asked you today to design the ideal student housing building with the need to address affordability issues, is there anything meaningful that could be done right now when those important conversations around valuation have not been had yet?
I think there is a lot of good thinking that’s been done already. For example, the A Designer at Heart team has produced a white paper on enhancing living spaces in PBSA. They have looked at things such as reducing the width of rooms and some non-ensuite spaces and shared study spaces and pulling the sizes of the kitchens down. What hasn’t been done in the sector is the cost and value work alongside it. While it is great that this has started the conversation in the industry, the problem is that this type of work really needs to be led by a client on a real project to give these issues the proper focus and ensure that local compliance is considered. Again, there is no silver bullet. The first question we should actually be asking is what is defined as affordable? What does affordable mean?
The next piece of work that needs to be done is to interrogate the financial model openly to say if we have a target figure of, for argument’s sake, reducing the rent by 20%, how does that then trickle down through the model to become “affordable”? How much needs to come off each component – it can’t all come from the construction cost. You would probably do well to take 5% of the construction costs at the moment.
We then need to reverse-engineer it to actually say, if everybody within this overall construction-development-investment cycle takes a small hit, how much then does that make the rent? I think the challenge is that there is little incentive for people to share the metrics that would enable us to get to the solution that we need. Everyone is focusing on their particular silo. But the solution is a combination of all those elements. The information is out there, however. The are the people that have got the answers, but they need to be incentivized to do the work and share it.
In terms of making certain elements more affordable, I think that one of the things that came out of A Designer at Heart’s work is the idea of moving away from cluster flats towards rooms off a corridor. That is a strategically interesting move. The question, however, is what would students want? But if that model makes the circulation much more efficient and knocks 20% of the cost per week, does that work? I don’t know.
The only thing that I think is a potential silver bullet is the conversion opportunity. If you buy to develop, you’ve got to buy the land and put the superstructure in. If you buy an existing building, you’ve got the superstructure there already, and you’re just fitting it out. It is often going to be cheaper to buy an existing building where you can then strip it right back down and then refit it. You can do some really interesting conversion schemes, but they’re a bit more complicated and a bit higher risk. They are often smaller scale as well because you don’t generally have buildings that are the massive footprints that you’d need for a 300 to 500 student purpose-built version.
GSL News: Do you think we’ll see more investors and developers put more emphasis on this issue in the same way that we have seen sustainability issues rise in importance?
I think it takes that one brave person to do it once and to make it successful, and then everyone else will follow. However, the challenge at the moment is that until we see occupancy levels drop, then the investors aren’t getting hit. So why would they change? I think a lot will be dependent on what direction the new government takes, with overseas students generally and with funding in the tertiary sector.
Shared rooms are the other thing that we’re not brave enough to do. Shared rooms work perfectly well in other countries, and there are some brilliant solutions that exist for providing privacy. Everyone is talking about the loneliness problem, and you get so much companionship from meeting somebody and then spending time with them. From a design point of view, there are things that you can do to make shared living a really lovely experience. But again, we’re not brave enough to do it. If you have really got to go for affordability, that’s where you look – not just at tweaking a bathroom arrangement.
