the class of 2020 - radar - interviews
April 21st, 2020

A turbulent year, but predicted clear skies for 2021

Jo Winchester is Executive Director, in the student accommodation Valuation and Advisory Team at CBRE and is a leading valuer of student accommodation across EMEA with over 17 years’ experience in the sector. The CBRE student accommodation team works with all the leading active investors, developers, owner-operators and lenders looking to deploy capital in student accommodation across EMEA. More recently, Jo has also been working with clients active in the emerging co-living sector. These organisations are a mixture of specialist and hybrid co-living providers, such as The Student Hotel and The Collective, and student players who are now diversifying into co-living.

Last week, we saw the industry begin to shape a ‘new normal’ for the day-to-day, the next academic year, and beyond. We interviewed Jo Winchester, Executive Director in the Student Accommodation Valuation and Advisory Team at CBRE, to hear her anticipation of the duration of this crisis for PBSA and coliving.

In her words “I think COVID-19 is totally unprecedented. It feels worse than the financial crisis in some ways. The impact will be felt for a while.” While Jo adopts a serious perspective on the current situation, she has hope for a potential return to normalcy in the academic year 2021/2022.

Q. Are you optimistic that PBSA will see a ‘rebound’ within this year?

What I think we’re seeing, particularly in the UK, is an anticipated disruption to the academic year 2020/2021. The universities are not in a position to discern whether they will run their courses in September and things are unlikely to completely return to normal until there is a vaccine. I think this is realistic.

Many of our lending clients are saying they are not going to lend or commission any valuations until September 2020. But I do agree that the enduring appetite for student housing and co-living gives us reason for optimism. Before COVID-19, student housing was in the best shape ever, with operators reporting lettings for next year of between 50-70%. It now looks as though this has slowed down completely. The disruption to the universities’ academic year will mean that there will very likely be an income shortfall next year, meaning it would be optimistic to say everything will be back to normal by the end of 2020. I think we’re talking 6-12 months of disruption with a return to normal for the academic year 2021/2022.

Q. Disruption to the next academic year was also widely predicted in our industry sentiment survey. The same survey also revealed that over 55 percent of our partner operators were concerned about investor relations and financing for projects. Is this something you recognize?

Operators are facing significant disruption and understandably they will be talking to their investors about how best to manage this situation. As it turns out, a number of the UK operators are still quite highly occupied. Several operators have offered students the opportunity to relinquish their contracts in the past two weeks. Obviously, that is going to have a large impact on their cashflow as they’re writing off large sums of money. Some companies might be concerned about meeting debt repayments, but in the UK, most of the banks are actually offering payment holidays during this time and finance directors will be negotiating this.

It is a very difficult decision. Unite was one of the first to announce they were letting students out of their contracts and a number of other operators have followed suit. A few of the third-party operators who operate on behalf of investors are understandably not making a bulk decision but are in negotiations with all of the different landlords.

The operators also take the duty of care to their staff and students incredibly seriously. They’ve worked very hard to help them self-isolate and to support international students in particular who may not be able to return home. The operators will be in a difficult balance between managing their cashflow, managing their responsibility to their staff and students and also any reputational risk surrounding being perceived to be doing the right thing.

Q. How are you dealing with the potential impacts of COVID-19 in PBSA valuations?

It would be odd if property valuations weren’t affected by this compared to other business indicators. Looking at the value of a property in the UK today, compared with 5 weeks ago, there will of course be a difference.

What we’ve mostly done is made income adjustments. In our March valuation round we allowed for no income for the summer term where students have been let out of contracts. There also won’t be a summer market this year. We haven’t necessarily drifted yields out yet in prime locations but that will be kept under review as things develop. For site valuations, where there is residual value, we would assume a longer time frame. There means a longer lead-in period including the knock-on delays of concluding planning applications as planning committees can’t sit. For new construction projects, there could be delays in materials being moved between countries or if the places of manufacture are closed. The supply chain of people is also likely to be affected, causing increases in the cost of getting materials.

Generally, if it takes longer the borrowing costs will be higher. That may have an effect on when a scheme is brought to market for letting, making that process less predictable. Then we may be making allowances for income shortfalls within the first operating year if we haven’t already done so. Altogether, I predict a drop in new projects started this year, which will likely be deferred until next year.

Q. We’ve spoken with you before about the rise of coliving and its relevance to PBSA players. Do you anticipate any changes in appetite for coliving models?

While the crisis will have a significant impact on some sectors such as retail, I don’t think any of the bed sectors are in that position. The underlying drivers for residential in general and co-living in particular still very strong. Co-living operators are reporting that whilst their short-stay business has been affected quite dramatically, they are still reporting healthy levels of new bookings coming on their long stays, and although residents are self-isolating there is good engagement with virtual events. The desire to connect socially hasn’t gone away and has in fact increased. I think we’re talking about short-term turbulence that will recover.