Portsmouth Student Halls Fail
We always said that the 'Build them and they will come' mentality of the REITs (Real Estate Investment Trusts) could not work – given the stratospheric rents these places need to charge to make money. Now it seems, the owners are looking for new ways to fill these buildings as they cannot find enough students able to afford £700 a month for a tiny room unsuited to anything else.
What Did We Say?
At the time these units were built, we argued that whilst more halls were needed, only a small proportion of students could afford the premium rates being charged for these halls and they would struggle to fill them. In their defence, the University made the same statements at Planning Committee meetings and in several cases, the Portsmouth Society also argued that whilst halls were much needed – the halls that were being built were 'single purpose', low quality and poorly designed and could not be re-used to house other types of tenant on other tenures.
The issue at the time (and still today), is that developers can avoid taxes and levies of all forms by constructing a student hall using a corporate investment vehicle known as a REIT (Real Estate Investment Trust) – so they don't need to make much money in order to retain a significant amount of the return. (See our fuller explanation here: Student Halls Avoid Even More Taxes - PDPLA News - Portsmouth and District Private Landlords Association )
What Has Changed?
Two planning applications this month seek to change the use of a student hall from 'solely student accommodation' to a "Temporary change of use of part of building for either student accommodation (sui generis) or serviced apartments (Class C1)." The 2 halls we have seen taking this option so far are Crown Place in Station Street and Unilife in Earlsdon Street both managed by Collegiate for their overseas owners.
They state, in their planning applications, that "the recent challenges brought about principally by the pandemic (whose impact is still being felt across the industry despite restrictions no longer being in place) means that Collegiate needs to incorporate some flexibility in the way its accommodation can be used to underpin its long term viability".
We would argue that the halls were built on the fallacy of ever-growing student numbers and simple demographics show that was wrong (there being 20% less 18 year olds this year than there were 5 years ago). Whilst numbers will grow over coming years to peak in 2030, there is no guarantee that Portsmouth will keep its share of this total or that the same proportion going forward will be as accepting of student debts as those in the past decade (as interest rates rise, the prospect of having an ever increasing student debt as you reach retirement is going to appeal to even fewer savvy students than today). It is therefore not hard to see why the lights have come on and the owners of these halls are asking to be allowed to change from 'student only' in order to pay the interest on their own debts and to ensure the high returns they promised their institutional backers.
The applications are for a change of use for all 35 rooms in Earlsdon Street and the 115 rooms in Crown Place for a period of 3 years. They also use the application to argue that the '40 week student contracts' mean the buildings sit empty for 12 weeks a year (due to planning restrictions applied when these blocks were approved, restricting their use to 'students only' due to the lack of parking and other infrastructure needed for other tenures).
It is almost amusing that Collegiate support their application by playing back PCC's anti-HMO rhetoric as part of their justification, "In conclusion, existing (PCC) policy advocates the building of purpose built student accommodation (PBSA) to mitigate against the over prevalence of HMOs to house students. Emerging policy indicates that the 'problem' of high rates of HMOs to accommodate students has been overcome and that the purpose built student accommodation should be flexible and adaptable to support alternative uses."
The error in their logic is that the proposed Local Plan, which they are quoting, proposes that any new student halls be flexible in that they are built in a way that allows them to be used for other types of use – such as much needed affordable housing. Under these proposals, the current halls would not have been approved as they are wholly unsuitable for anything other than student use.
The only way these hall providers could possibly look to achieve the £700+ per month income per room that they expect from students is to offer the same rooms as 'serviced accommodation' – in this way they can keep the rooms expensive, they can avoid the issues of tenancy management as no one will actually 'live' there and all will be on short term contracts. There is a need in the city – currently we have around 600 Airbnb style serviced flats operating in Southsea – in winter they are filled with workers and contractors but in the summer there is a real shortage as these visitors are displaced by holiday visitors who expect more and pay more.
The big problem is parking, these halls gained permission for students on the basis that students do not bring cars. Short term guests generally do come by car (in our experience more than 75% of them anyway) which would create chaos in the town centre. We are not talking about pepper-potting a few flats around the City but, potentially, a flood of rooms in two locations which have absolutely no nearby parking provision.
To Approve Or Reject?
The city is desperately short of affordable housing and small, one and two bedroom apartments. If these can be provided by PBSA providers in a flexible manner, such that when there is a downturn, they can be re-purposed for others in need, this could be a real boost and benefit for the city. The challenge is to build these rooms at or below 'HMO Room Rates' (£400-500 / month) – only then will the councils dream of limiting HMOs be possible and only then, will PBSA owners be able to afford to meet the needs of non-students.
Sadly, these halls were built on a 'student only' business model that needs to earn £700/month and not pay any local (or corporate) taxes. Anything less and these companies become untenable. This is why they are trying to get permission to move into the 'serviced accommodation' space rather than accept lower rents and house either more students from across the city or better, a mix of students and others who need single person accommodation.
If the city allows these companies to switch from student lets to serviced accommodation, the influx of cars trying to park on city streets or elsewhere will turn todays issues with parking into an idyllic alternative to what we would face with these changes approved.
What Does It Mean For The Council
It would be nice for these halls to pay council tax as they should for the 12 weeks a year they are empty. If they do start short-letting to non-students, these properties will also fall liable to business rates. Whilst these additional incomes will probably be very appealing to councillors, they need to be balanced with the impact on the local economy of all monies collected by PBSA's being spirited to corporate accounts elsewhere (Collegiate for example, is registered in Wantage, Oxfordshire but operates in the UK, Spain, Italy and Portugal and the owners of both blocks are non-UK entities).
The other side of the coin is that currently, all of the 600 or so serviced accommodation providers in Southsea are largely people from the area letting locally, using local trades for maintenance and spending money locally.
What Does It Mean For Landlords & Students
There will be little impact on landlords except those who also offer serviced accommodation, for whom competition is always going to be an issue – the returns look so good that others are always tempted into the pool to see if they can get their share, most soon realise that the costs are commensurate with the returns but that does not mean Serviced Accommodation providers will ever be able to rest on their laurels.
The real losers will be students. For most, a room in a hall is a poor deal. You pay a lot of money for a very small room, you suffer the regular 5am fire alarms as some idiot coming back from a night out decides that everyone else should be awake and you get no exposure to the local community or experience of learning to live as an adult.
Maybe this is fine – parents want to feel their 18-year-old offspring is in a safe environment and will be looked after – the halls sell that messaging much better than local landlords renting local properties, and the 18-year-old in question often needs a year to transition from a world where toilet rolls magically replenish themselves to one where you have to do it yourself.
However, once the young student realises that a lifelong debt incurred from living in conditions they don't actually enjoy is not a good deal – the vast majority transition to the much more affordable accommodation living with friends independently in the community. If the halls providers want to keep more students (which is all their properties are suitable for) then the simple option is to lower their prices.
If a fully inclusive room in a local house shared with friends can be had for £400-450/month, then the 'right price' for halls rooms is probably £350-400/month. If the halls providers cannot offer rooms at those prices then sadly, they either need to accept they will have empty rooms or they need to default on their debts and allow whoever takes on the properties, unencumbered by those debts, to offer rents at levels appropriate for the accommodation offered.
If the city agree to these proposals, the owners will continue laughing at us as their overseas bank accounts swell, if the city rejects them, everyone in the city will benefit.