Ahead of the Chancellor’s statement on 16 March, Indigo asked Dr John Boyle, Head of Research and Strategy at Rettie & Co to outline the Private Rented Sector’s hopes and concerns for this year’s Westminster Budget.
Student accommodation has emerged as the outstanding performing property asset class in the UK in recent years. Previously treated with something regarding contempt by many investors, due to worries about itinerant students and high maintenance costs, the explosion in student numbers that we have seen in the UK (including the successful ‘recruiting’ of foreign students), as well as the emergence of Purpose Built Student Accommodation providers (PBSAs) to build for the student market efficiently and effectively, has created a booming new property class that almost did not even notice the recession that crippled all other classes of property.
Despite this ramping up in provision, there is a struggle to keep up with demand. The HMO sector has filled much of the gap, housing students in the private rented sector (PRS), but there are doubts about the ability of this sector to continue to do so. In last year’s June Budget they faced the double onslaught of the Chancellor’s decision to restrict mortgage interest tax relief for buy-to-let and the replacement of the ‘wear and tear allowance’ from April this year. The deadening effect of these policies will be compounded further here in Scotland by the Scottish Government’s tenancy reforms, which may cause many landlords to leave the sector.
To illustrate this, we can have a look at the size of the sector in Edinburgh and the challenges it faces over the next few years. It is difficult to be completely precise about where students are staying at any one time, but we have put together the evidence based on a number of valid sources.
There are 56,420 students in Higher Education in Edinburgh. According to national figures from Higher Education Statistics Agency (HESA), broadly 20% live at home with parents and 15% live in their own home.
Based on these assumptions, this leaves just under 37,000 students requiring accommodation in Edinburgh. There are currently 13,049 PBSA beds in Edinburgh, with a further 6,183 in the planning pipeline, according to City of Edinburgh Council figures from 2015. If all those beds were delivered, this would still leave 17,441 (31%) of the student population needing a bed (assuming no change in student population levels). This is in line with the national average of students who end up in other rented accommodation (the so-called PRS, or Houses of Multiple Occupation, HMOs) according to HESA.
There are currently 5,949 HMO properties in Edinburgh, providing a minimum of around 18,000 beds, based on a 3-bed threshold. There are no firm statistics on the percentage of these that will be students, but an assessment by various letting agents suggests around 80%. Based on this, HMO properties supply around 14,000 student bed spaces (at 3-beds per property), or 19,000 (at 4-beds per property). This gives a current 3,000+ bed shortfall at 3-beds per property or around 1,600 surplus at 4-beds per property.
It therefore appears likely that demand/supply is probably in-balance in Edinburgh at the moment in the student market, which does demonstrate that we have a reasonably responsive and functioning market. However, with tenancy reform that could change.
The Scottish Government is committed to allowing for long-term tenancies, with legislation now going through Holyrood. The industry has continually warned the Government during this process that the special needs of the student market need to be considered. The Government has agreed, sensibly, to exempt PBSAs from the legislation, which will join University Halls in this special category. However, HMOs, which, as we see above, houses the vast bulk of students who stay away from home, have no such special status. Crucially, the new legislation will prevent HMO landlords from setting defined dates at the start of tenancies, making it much harder to enable them to market their properties for the next year student intake or for events like the Edinburgh Festival. Smaller/HMO investors are also likely to be hindered by the above mentioned changes to reliefs and allowances, set to make them worse off, and a Land & Building Transaction Tax (LBTT) supplement of 3% of purchases of buy-to-let properties due to take effect on 1 April this year.
Even a relatively small percentage of HMO landlords leaving the student sector will have a dramatic effect on the demand/supply balance. Assuming a relatively minor disinvestment of 10% would generate a shortfall, taking the market from a broadly equilibrium state to up to around 4,500 student bed spaces short. A 15% divestment rate would produce a shortfall of up to around 5,300 bed spaces, i.e. up to around 1 in 7 of all Edinburgh students who need accommodation in the city will be unable to find any even with a relatively modest divestment level.
It is likely that with this slew of legislative change, hot on the heels of tax changes from the Treasury, there will be some divestment in the sector. Landlords may not necessarily sell up (although some will), but instead may move across to other parts of the PRS, such as young professionals, where they may be able to charge higher rents and lower void rates.
For the country’s students, there will likely be less available accommodation and higher rents and poorer quality accommodation of what remains. Those students may wish to then turn to their own representative bodies (as well as the Government) to see how such a situation arose. Attacking the sector that provides most of the accommodation to your own members, as bodies such as NUS Scotland has done, may seem more crass then than it does now.
The lessons of all this are complex because they reflect the complexity of our devolved institutions. This week, landlords will be keeping fingers crossed hoping that the Chancellor won’t impose more pain on the sector as he attempts to pour cold water on a PRS that may be overheating in parts of England, but which will struggle to keep its head above water here in Scotland. If there is more action on Wednesday against the buy-to-let sector, then we hope that the Scottish Government stops to consider more carefully the effects of its own policies which are in danger of compounding difficulties faced by individual investors, encouraging them to sell up altogether, thereby removing altogether much needed supply from Scotland’s private rented sector.
Dr John Boyle
Director of Research & Strategy
Rettie & Co Ltd