Articles

How much debt can a student housing scheme support?

Sizing a loan on purpose-built student accommodation the way a lender does: re-underwrite the NOI, run three tests, and find out which one binds.

Julian R. Sterling · from Student Housing Real Estate

A student housing loan is the lowest of three loans: the LTV loan on value, the interest cover loan and the debt yield loan, the last two on the lender's own NOI, which strips summer income, stresses occupancy and reserves for capex. On an illustrative 450-bed scheme worth £59,246,814, interest cover binds at £24,424,077, 41.2 per cent LTV and £54,276 a bed, nearly a third less than the £35,548,089 a 60 per cent LTV headline suggests.

Worked in full in Student Housing Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →

The case

A let, stabilised scheme of 450 beds being refinanced. The sponsor's NOI is the one in the sales pack; the lender re-underwrites it. All figures are illustrative.

Inputs

Input	Sponsor	Lender
Beds	450	450
Achieved rent, 51-week tenancy	£195.00	£195.00
Occupancy	98%	93%
Summer income, net	£120,000	excluded
Operating cost per bed	£2,600	£2,600
Management fee on revenue	5%	5%
Capex reserve per bed	none	£250

Loan terms: maximum LTV 60%, minimum interest cover 1.75x, minimum debt yield 9.5%, all-in interest rate 6.25%. Value at a 5.25% yield on the sponsor's NOI.

The calculation, step by step

1. The two NOIs.

Sponsor NOI and lender NOI, £

Line	Sponsor	Lender
Academic-year rent (beds × rent × 51 × occupancy)	4,385,745	4,161,982
Summer income	120,000	0
Operating costs	-1,170,000	-1,170,000
Management fee	-225,287	-208,099
Capex reserve	0	-112,500
NOI	3,110,458	2,671,383
NOI per bed	6,912	5,936

The lender's NOI is 14.1 per cent lower. Each adjustment has a reason specific to the asset class: the rent roll expires every summer and is re-let from nothing, so the lender will not lend against a 98 per cent September; summer lettings are short-stay and uncontracted; and the refurbishment cycle is a cost of keeping the rent, not an optional extra.

2. Value. £3,110,458 / 5.25% = £59,246,814, £131,660 a bed. The lender's valuer may use a different figure; here it uses the same.

3. The three loans.

The result

Interest cover binds. The scheme supports £24,424,077, 41.2 per cent of value and £54,276 a bed. On that loan the debt yield is 10.94 per cent, comfortably above 9.5, and the interest cover on the sponsor's own NOI is 2.04x, which is the figure the borrower will quote and the lender will not use. The sponsor needs £34,822,738 of equity at value.

Sized on the sponsor's NOI the ICR loan would be £28,438,471, 48.0 per cent LTV. So the lender's re-underwriting costs the borrower about £4m of proceeds before any test of value is applied.

That gap is the cost of a lender treating the scheme as what it is: an operating asset whose income is re-sold every year, with no lease covenant behind it. A borrower who wants more proceeds has to argue the inputs, not the ratio: evidence of re-letting over several Septembers to support a higher underwritten occupancy, a contracted summer operator to bring part of the summer back, or a recently completed refurbishment to justify a lower reserve.

On these inputs the LTV test never binds. The 60 per cent loan of £35,548,089 would pass 1.75x cover on the lender's NOI at an all-in rate of 4.29 per cent or less, but at any rate the debt yield test caps the loan at £28,119,825.

What if occupancy or rates change?

Loan by occupancy the lender underwrites, 6.25% rate

Underwritten occupancy	Lender NOI	ICR loan	Debt yield loan	Loan	LTV
90%	2,543,839	23,257,954	26,777,250	23,257,954	39.3%
93%	2,671,383	24,424,077	28,119,825	24,424,077	41.2%
95%	2,756,413	25,201,491	29,014,875	25,201,491	42.5%
98%	2,883,958	26,367,614	30,357,450	26,367,614	44.5%

Loan by all-in interest rate, 93% occupancy

Rate	ICR loan	Loan (lowest of three)	LTV
5.25%	29,076,282	28,119,825	47.5%
5.75%	26,547,909	26,547,909	44.8%
6.25%	24,424,077	24,424,077	41.2%
6.75%	22,614,886	22,614,886	38.2%

Each point of underwritten occupancy is worth roughly £390,000 of loan, and each half-point of rate between £1.8m and £2.5m of ICR capacity, more at lower rates because interest cover is a division by the rate. At 5.25 per cent the debt yield test takes over from interest cover, which is why borrowers who negotiate the ICR hard often find the loan barely moves.

The common mistake

Starting from the LTV. Borrowers ask "what LTV can I get?" and model 60 per cent; on these inputs that overstates proceeds by £11.1m. The second mistake is sizing on the rate card rather than achieved rent, which builds the gap between what a bed is offered at and what it collects straight into the loan; RevPAB on the right base is the fix. Once the loan is sized, the occupancy at which it breaches is the next question, worked in break-even occupancy for student housing.

Takeaway

• Loan = MIN(LTV × value, lender NOI / (ICR × rate), lender NOI / debt yield).
• Lender NOI here is 14.1 per cent below the sponsor's: no summer, 93 per cent occupancy, a capex reserve.
• Interest cover binds at £24,424,077, 41.2 per cent LTV, £54,276 a bed.

The book takes a 520-bed scheme from rate card to value and debt, and the free workbook for this case carries a debt sheet alongside the ten-year cash flow.

Questions readers ask

What LTV do lenders offer on student accommodation?

Headline LTVs on let, stabilised schemes are often quoted in the 50 to 60 per cent range, but treat any level as illustrative and expect another test to bind first. On the 450-bed scheme here a 60% LTV would allow £35,548,089, but interest cover at 1.75x on the lender's NOI limits the loan to £24,424,077, 41.2% of value.

Why do lenders exclude summer income from student housing NOI?

Because it is short-stay, seasonal and often not contracted when the loan is sized. On the illustrative scheme the summer adds £120,000 of net income, and with occupancy stressed from 98 to 93 per cent and a capex reserve of £250 a bed, the lender's NOI is £2,671,383 against the sponsor's £3,110,458, a 14.1% haircut.

Does the LTV ever size a PBSA loan?

Only when both income tests allow more than the LTV loan. On the illustrative scheme a 60% loan of £35,548,089 passes 1.75x interest cover on the lender's NOI only at an all-in rate of 4.29% or less, and even then the 9.5% debt yield test caps the loan at £28,119,825. At 6.25% interest cover binds and the loan is £24,424,077, so LTV never sizes this loan.

Also on this site

• What occupancy does a student housing scheme need to break even?Split fixed from variable costs: a 400-bed scheme at £185 a week covers interest at 75.7 per cent occupancy, not the 63.5 a margin shortcut gives, and 1.25x at 85.8.
• How do you calculate NOI for a student housing scheme?Build rent from bed-weeks, net the summer, deduct cost per bed and fee: £3,850,675 on 600 beds, £6,418 a bed, a 67.2 per cent margin.
• How do you value student accommodation per bed?Capitalise NOI, then divide by beds: £7,200 a bed at 5.50 per cent is £122,574 a bed. The same price on a £5,400 scheme overvalues it by 39.4 per cent.
• How do you forecast student housing occupancy from booking pace?Scale this year's reservations by last year's late pickup: 310 beds against 335 projects 89.9% to 92.2% occupancy on 500 beds, short of a 95% budget.
• How do you calculate RevPAB for student housing?Rent collected divided by available bed-weeks: £182.93 over 44 academic weeks, £174.43 over 52, on a scheme whose rate card averages £201.75. Always name the base.
• How do you calculate a city's student-to-bed ratio?Students living away from home divided by purpose-built beds: 36,400 / 18,400 = 1.98 per bed, not the 3.34 of counting every student, and 1.58 after the pipeline.

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