• 30 July 2024

The purpose-built student accommodation (PBSA) sector in the UK has undergone significant expansion in recent years. This has been driven by various factors, including a growing student population, increased international investment and a shift in expectations regarding the quality of living facilities. In this article, we explore what these changes might mean for development risks and insurances.

Supply and demand

Student numbers in the UK are at record high. Whilst there has been a decline in EU students since Brexit, this has been offset by an influx coming from outside of Europe. Primarily from China, India and Nigeria, the number of international students within the UK increased by 12.4% during 2022/23. These figures demonstrate the demand for PBSA, especially as international students are more likely to remain in purpose-built student halls throughout their studies.

The supply for accommodation is struggling to keep up with the high levels of demand, leaving an estimated shortfall off 580,000 beds nationally. Some of the main reasons for this have been higher costs for construction, stricter safety regulations (e.g. cladding and fire safety), increased complications with planning and greater pressures on building more energy efficient buildings. The shortfall in supply is likely to lead to higher rent for students.

Investment

The surge in demand for PBSA is driving for more funding within the sector. Investment has been strong and this is set to carry on throughout the remainder of 2024. We’re seeing new entrants coming into the market and a lot of capital from overseas (mainly the US and Singapore). Rising student rents will mean renewed investment activity will be supported. Plus, the real estate market predicts that appetite will remain strong for the next couple of years.

There will be a growing emphasis on the funding of energy-efficient assets, driven by the mounting pressure on companies to meet their net zero targets. This is likely to redirect money from older, less efficient assets that don't align with current regulation, to opportunities for new sustainable developments.

Risk and insurance considerations

Given the unique nature of PBSA developments, it is fundamental that a comprehensive risk assessment and robust insurance programme are in place for a successful project delivery.

Owner controlled insurance programmes (OCIPs) have rapidly become the preferred way for owners/developers to insure and manage risk for their construction projects.

In this section, we focus on how the shift in risk allocation and factors, such as growing rates of insolvency, are forcing developers to rethink their traditional insurance approaches. 

Control

  • One of the main reasons owners take an OCIP approach, is that it gives them full control over their risk management strategy, plus the opportunity to understand coverage gaps before the project starts (rather than when a loss occurs).

Financiers

  • PBSA owners are likely to be required by their financiers to protect themselves against the risk of lost rent caused by a delay in practical completion, mainly due to the revenue expected at the start of the academic year. When taking an OCIP approach, you can add delay in start-up (DSU) insurance, which covers the loss of revenue incurred following delayed completion caused by loss or damage to the contract works. This cover is only available for the project owner and cannot be purchased by the contractor. 

Continuity of coverage

  • It is no secret that the construction industry is facing a tough time, with many contractors having to file for administration. If the owner of a PBSA development decides to allocate the insurances to the contractor, and said contractor goes into administration, any existing insurances will normally become void. This leaves a half-built project uninsured and exposed to dangers such as theft, arson and vandalism. Following this, the owner will have to seek urgent replacement insurance for the partially built works. Considering the heightened risk posed by the new contractor adopting incomplete works, insurance providers may demand increased premium rates, offer limited coverage for the project's remaining duration, or in some cases, refuse to insure. When taking an OCIP, you are guaranteed continuity of cover in the unfortunate case that the contractor goes into administration and a seamless transition for when choosing a new contractor to carry out the works.

Control over risk management, revenue protection and continuity of coverage are some of the many reasons why we would highly recommend avoiding reliance on the contractor’s insurance (per JCT 6.7A) and would strongly advise taking an owner controlled insurance programme (OCIP) approach as per JCT 6.7B/C.

Here to help

Miller’s Construction team has extensive expertise in providing risk advisory and insurance solutions for PBSA projects. Get in touch with our team below to discuss any active or upcoming projects.

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