Build the cost per bed up from area per bed and the build rate through every layer to total development cost, then test it against net income per bed.
Divide the total development cost by the number of beds, not the build contract. On an illustrative 500-bed scheme, construction at £2,750 per m2 is £72,600 a bed, but land, externals, contingency, fees, planning obligations and finance take the all-in cost to £114,331 a bed. Against net operating income of £7,000 a bed that is a yield on cost of 6.12 per cent, not the 9.64 per cent the build cost alone 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 →
Cost per bed is the unit the market prices purpose-built student accommodation in, so it is the unit a development appraisal has to land in too. The trap is that "cost per bed" is quoted at three different levels: the contractor's rate times floor area, the construction budget with fees and contingency, and the total development cost. Only the last can be compared with a value per bed or used for a yield on cost.
| Input | Value |
|---|---|
| Cluster en-suite beds, gross internal area per bed, m2 | 350 at 24.0 |
| Studios, gross internal area per bed, m2 | 150 at 32.0 |
| Build rate, £ per m2 of gross internal area | 2,750 |
| Externals and abnormals, of build cost | 6% |
| Contingency, of build and externals | 5% |
| Professional fees, of build and externals | 11% |
| Land, £ | 8,000,000 |
| Planning obligations and levies, £ | 1,200,000 |
| Loan to cost, interest rate, programme | 60%, 7.50%, 30 months |
| Average share of the loan drawn over the programme | 55.0% |
| Stabilised net operating income per bed, £ | 7,000 |
| Exit yield, purchaser's costs | 5.25%, 6.8% |
The area is the first driver. The scheme has 13,200 m2 of gross internal area, or 26.4 m2 a bed: clusters share kitchens and corridors and need 24.0, studios carry their own kitchenette and need 32.0, a third more. The room mix sets the cost per bed before a single rate is agreed.
Build cost = gross internal area × rate = 13,200 × 2,750 = 36,300,000, or 72,600 a bed
Construction budget = build × (1 + externals) × (1 + contingency + fees) = 44,634,480, or 89,269 a bed
Excel: =GIA*Rate*(1+Ext)*(1+Cont+Fees)
Externals, contingency and fees add £16,669 a bed between them. The construction budget works out at £3,381 per m2, which is the figure to compare across schemes; the £2,750 is only the contractor's rate for the building itself.
| Line | Total | Per bed | Share |
|---|---|---|---|
| Build cost | 36,300,000 | 72,600 | 63.5% |
| Externals and abnormals | 2,178,000 | 4,356 | 3.8% |
| Contingency | 1,923,900 | 3,848 | 3.4% |
| Professional fees | 4,232,580 | 8,465 | 7.4% |
| Land | 8,000,000 | 16,000 | 14.0% |
| Planning obligations and levies | 1,200,000 | 2,400 | 2.1% |
| Finance | 3,331,008 | 6,662 | 5.8% |
| Total development cost | 57,165,488 | 114,331 | 100.0% |
Finance is the loan share of the pre-finance cost, 53,834,480, times the rate, times 2.5 years, times the 55.0 per cent average draw. A full appraisal builds it month by month from the cash flow, but the shortcut is close enough to size the line. The build contract is under two thirds of the cost per bed.
Yield on cost = NOI per bed ÷ cost per bed = 7,000 ÷ 114,331 = 6.12%
Net value per bed = NOI ÷ exit yield ÷ (1 + purchaser's costs) = 7,000 ÷ 5.25% ÷ 1.068 = 124,844
Profit on cost = 124,844 ÷ 114,331 − 1 = 9.2%
The scheme yields 87 basis points above the exit yield and makes £10,513 a bed, 9.2 per cent on cost. A developer working to 15 per cent would need the build rate to fall to £2,583 per m2, 6.1 per cent lower, with everything else held. The general method is set out in how to calculate yield on cost in real estate development; what is specific to student housing is that both sides of the ratio are counted per bed.
| Build rate, £/m2 | 24.0 m2 a bed | 26.4 m2 a bed | 30.0 m2 a bed |
|---|---|---|---|
| 2,500 | 97,879 / 7.15% / 27.5% | 105,713 / 6.62% / 18.1% | 117,465 / 5.96% / 6.3% |
| 2,750 | 105,713 / 6.62% / 18.1% | 114,331 / 6.12% / 9.2% | 127,257 / 5.50% / −1.9% |
| 3,000 | 113,548 / 6.16% / 9.9% | 122,948 / 5.69% / 1.5% | 137,050 / 5.11% / −8.9% |
The table holds income per bed constant, which is harsh on the studio-heavy column: studios do let for more, but rarely a third more, which is what their extra area costs, so the gap narrows without closing. Every additional square metre per bed costs about £3,591 of total development cost here. On a fixed site the mix decision is also a bed-count decision, since fewer, larger rooms reduce the number of beds that carry the land.
Quoting the build contract as the cost per bed. £72,600 against £7,000 of income reads as a 9.64 per cent yield and a development that cannot fail. The real figure is 6.12 per cent, because land, fees, contingency, planning obligations and finance add 57.5 per cent on top of the build cost. The second mistake is comparing a cost per bed with a value per bed computed on a different income: a value per bed built on gross rent, before operating costs, will make any cost per bed look cheap. Value both sides from the same net operating income, as in how to value student accommodation per bed.
Build up the cost per bed from area per bed, the build rate and every layer above it, then test it against net operating income per bed. On this scheme the contractor's £72,600 becomes £114,331 all in, a 6.12 per cent yield on cost and a 9.2 per cent profit that does not clear a 15 per cent target. Student Housing Real Estate works the income side, from rate card to the revenue a bed actually earns, and the free workbook for this case carries the operating cost base per bed that the yield depends on.
On the illustrative 500-bed scheme, 63.5 per cent. The build contract is £72,600 of a £114,331 total cost per bed; land is 14.0 per cent, professional fees 7.4, finance 5.8, externals 3.8, contingency 3.4 and planning obligations 2.1. Land is the line that varies most between cities, so compare schemes on construction cost per m2 as well as on cost per bed.
Because each studio needs its own kitchenette and more floor area: 32.0 m2 of gross internal area a bed against 24.0 for a cluster en-suite in the illustrative scheme, a third more. At £2,750 per m2 that is £22,000 of extra build cost a bed before fees and contingency, which the studio's higher rent has to repay.
Enough above the exit yield to pay for the risk. On the illustrative scheme a 6.12 per cent yield on cost against a 5.25 per cent exit yield, 87 basis points, produces a 9.2 per cent profit on cost. A 15 per cent target needs the build rate to fall to £2,583 per m2, or income per bed to rise.
This article is one calculation from Student Housing Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: real estate investing, finance and fund management → · All 1340 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.