Three break-even points, operating, cash and covenant, computed from the contribution of one let bed, and why the opex ratio shortcut flatters them.
Break-even occupancy is the fixed cost to be covered divided by what every bed would contribute if all were let. On an illustrative 400-bed scheme at £185 a week on a 51-week tenancy, operating profit breaks even at 35.2 per cent, interest is covered at 75.7 per cent, and a 1.25x interest cover covenant needs 85.8 per cent. The shortcut of applying the margin to revenue gives 63.5 per cent and hides twelve points of risk.
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 →
A lender is credit-approving a £24,000,000 interest-only loan at 5.50 per cent on a let purpose-built student scheme, with a 1.25x interest cover covenant. The borrower's model runs at 97 per cent occupancy, which the scheme has achieved for three years. The credit question is how far that can fall. All figures are illustrative.
| Input | Value |
|---|---|
| Beds | 400 |
| Average achieved rent | £185.00 a week |
| Tenancy length | 51 weeks |
| Fixed operating costs (staff, insurance, base utilities, maintenance) | £1,150,000 |
| Variable cost per let bed (utilities, cleaning, letting) | £900 |
| Management fee | 4% of revenue |
| Loan, interest-only at 5.50% | £24,000,000 |
| Interest cover covenant | 1.25x |
Contribution per let bed. A bed let for 51 weeks at £185 earns £9,435. The management fee takes £377 and the variable costs £900, so each let bed contributes £8,158 towards fixed costs and debt. With all 400 let, total contribution would be £3,263,040.
Three thresholds. Each break-even is a different amount of fixed cost divided by that capacity.
Break-even occupancy = amount to cover / (beds × contribution per bed)
NOI zero: 1,150,000 / 3,263,040 = 35.2%
Cash: (1,150,000 + 1,320,000) / 3,263,040 = 75.7%
Covenant: (1,150,000 + 1.25 × 1,320,000) / 3,263,040 = 85.8%
Excel: =(Fixed+ICR*Loan*Rate)/(Beds*(Rent*Weeks*(1-Fee)-VarBed))
| Threshold | To cover | Occupancy | Beds let | Beds unlet |
|---|---|---|---|---|
| Operating break-even (NOI = 0) | 1,150,000 | 35.2% | 141 | 259 |
| Cash break-even (NOI = interest) | 2,470,000 | 75.7% | 303 | 97 |
| Covenant (NOI = 1.25 × interest) | 2,800,000 | 85.8% | 343 | 57 |
At the 97 per cent the model assumes, 388 beds are let, NOI is £2,015,149 and interest cover is 1.53x. Headroom to the covenant is 11.2 points of occupancy, 45 beds.
At 97 per cent, revenue is £3,660,780 and operating costs £1,645,631, a 55.0 per cent margin. The quick method assumes costs keep that ratio as occupancy falls, so break-even is interest divided by 55.0 per cent of gross potential rent of £3,774,000: 63.5 per cent. It is wrong because most of the cost base does not leave with the students. The staff, insurance and base utilities of an empty block are much the same as those of a full one, so the margin collapses as occupancy falls. The shortcut understates the cash break-even by 12.2 points, more than the whole covenant headroom.
In student housing a missed occupancy target is not a few weeks of void. The rent roll is sold once, for an academic year starting in September, and beds that are not let by then are usually empty until the next one. Each point of occupancy here is £32,630 of NOI for twelve months.
The weekly rent and the tenancy length set contribution per bed; leverage sets how much of it is spoken for. The 44-week rows assume no summer income, which is the downside for a scheme whose summer letting fails.
| Tenancy | Rent a week | Rent a year | NOI zero | Cash | 1.25x covenant |
|---|---|---|---|---|---|
| 44 weeks | £165 | 7,260 | 47.4% | 101.7% | 115.3% |
| 44 weeks | £185 | 8,140 | 41.6% | 89.3% | 101.2% |
| 44 weeks | £205 | 9,020 | 37.1% | 79.6% | 90.2% |
| 51 weeks | £165 | 8,415 | 40.1% | 86.0% | 97.5% |
| 51 weeks | £185 | 9,435 | 35.2% | 75.7% | 85.8% |
| 51 weeks | £205 | 10,455 | 31.5% | 67.6% | 76.6% |
Above 100 per cent means no occupancy can meet the test. A 44-week scheme at £185 cannot pass a 1.25x covenant at this loan size even when full, which is why summer income, and its reliability, belongs in the credit paper rather than in a footnote.
| Loan | Cash | 1.25x covenant |
|---|---|---|
| £18,000,000 | 65.6% | 73.2% |
| £21,000,000 | 70.6% | 79.5% |
| £24,000,000 | 75.7% | 85.8% |
| £27,000,000 | 80.8% | 92.1% |
Besides the margin shortcut, the frequent error is using the rate card rather than achieved rent. The rate card is what a bed is offered at; the rent that pays the interest is what is collected after discounts, nomination terms and cancellations, and the gap is often several per cent. Run the break-even on achieved rent per bed, as in how to calculate RevPAB for student housing, and separate the cost lines honestly into those that leave with a student and those that do not.
The book works a full scheme from rate card to collected revenue, and the free workbook for this case prices every point of occupancy on its own building.
It depends almost entirely on leverage and tenancy length, which is why no single figure is meaningful. In this illustrative scheme the cash break-even is 65.6 per cent with an £18,000,000 loan and 80.8 per cent with £27,000,000. Moving the same rent from a 51-week to a 44-week tenancy, before any summer income, raises it from 75.7 to 89.3 per cent.
Because the rent roll is sold once a year. Beds not let by the start of the academic year usually stay empty until the following September, so a shortfall lasts twelve months rather than a few weeks of void. Here each point of occupancy is worth £32,630 of NOI, and a ten-point miss costs £326,304 for the whole year.
Annual rent per bed (weekly rent times tenancy weeks) less the management fee and the costs that exist only when a bed is let, such as utilities, cleaning and letting cost. At £185 a week for 51 weeks that is £9,435 of rent, less a £377 fee and £900 of variable cost, giving £8,158.
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.
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