Bills-included rents make the owner short energy. What matters is the months before the rate card can move.
In an all-inclusive student rent the operator is short energy: every pound the tariff rises comes out of net operating income until next year's rate card can carry it. On an illustrative 450-bed scheme, electricity up 50 per cent and gas up 80 per cent cost £442 a bed, £199,044 a year, 8.9 per cent of NOI. Because rents are re-sold every September, the real loss is the 11 months before they reprice, £182,457, not the £3,791,314 that capitalising the hit as permanent would suggest.
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 →
Almost every purpose-built student scheme sells its rooms with bills included. That is a selling point to a student and a commodity position to an owner: the rent is fixed for the tenancy, the consumption is not controlled by the operator, and the price of the kilowatt-hour is set by a market that does not care about the academic year. The question an investor asks when tariffs jump is how much of the value goes with them. The answer depends on one thing the yield does not show, which is how long it takes before the rent can move.
| Input | Value |
|---|---|
| Beds | 450 |
| Average rate, a week, for 44 weeks | £185.00 |
| Occupancy | 97% |
| Electricity per occupied bed, a year | 2,400 kWh at £0.24 |
| Gas per occupied bed, a year | 3,000 kWh at £0.07 |
| Other operating cost per bed, a year | £1,650 |
| Other income per bed, a year | £120 |
| Management fee, on revenue | 8% |
| Valuation yield | 5.25% |
Revenue is £7,896 of rent plus £120 of other income, £8,016 a bed. Energy costs £559 of electricity and £204 of gas, £762 a bed, 9.5 per cent of revenue, or £17.86 for every week of rent sold. After other costs and the fee, NOI is £4,962 a bed, £2,232,952 for the scheme, a 61.9 per cent margin, and the scheme is valued at £42,532,423.
Step 1. Price the rise per bed
Electricity: £559 × 50% = £279. Gas: £204 × 80% = £163. Total £442 a bed, a 58.0 per cent rise in the energy bill.
Step 2. Take it through NOI
£442 × 450 = £199,044 a year. NOI falls from £4,962 to £4,520 a bed, 8.9 per cent, and the margin from 61.9 to 56.4 per cent. The fee is on revenue, so the operator's fee does not move: the owner carries the whole rise.
Step 3. Count the months before the rent reprices
A rise that lands in October hits a rent roll already sold for the year. Next year's rate card goes on sale in the new year and takes effect in September: 11 months unpriced. £199,044 × 11 / 12 = £182,457, 0.43 per cent of value.
Step 4. Find the rent rise that recovers it
The extra rent has to cover the cost and the fee charged on itself: £442 / (44 × 97% × (1 − 8%)) = £11.26 a week, 6.1 per cent, a rate of £196.26. Ignoring the fee gives £10.36 and leaves the owner short.
Capitalise the £199,044 at 5.25 per cent and the scheme loses £3,791,314, taking the value from £42,532,423 to £38,741,109. That is the figure that alarms a committee, and it is wrong in most cases, because it assumes the rent can never move. In student housing the whole rent roll is re-sold every year, so a cost rise that the market can bear is repriced within one cycle. What is lost is the lag: £182,457, about one twentieth of the capitalised figure.
The capitalised figure becomes the right one only to the extent the 6.1 per cent rent rise cannot be achieved. That is an affordability question about the city, the competing schemes and the shared houses that charge bills separately, and it deserves its own sensitivity: if only half the rise can be passed on, half the £3,791,314 is a real loss of value.
A fixed-price supply contract covering 70 per cent of the volume cuts the annual hit to £133 a bed, £59,713, and the unpriced months to £54,737. Hedging does not remove the exposure; it moves it to the date the contract is renewed, which is why the contract should end after the rate card for the following year has been set, not before.
| Energy price rise | Unhedged | 50% hedged | 70% hedged | Rent rise to recover |
|---|---|---|---|---|
| 25% | 78,625 | 39,312 | 23,587 | 2.6% |
| 50% | 157,249 | 78,625 | 47,175 | 5.2% |
| 100% | 314,498 | 157,249 | 94,349 | 10.5% |
A doubling of energy prices needs a 10.5 per cent rent rise just to stand still, on top of any rise needed for other costs. That is where repricing stops being automatic. Another way to read the same exposure: an 84 per cent rise in the energy bill costs the owner as much as the operator's entire management fee.
Treating energy as a fixed cost. Consumption follows the students: an empty bed uses little power, so the bill falls with occupancy, and a scheme that lets badly in a high-price year is partly protected. The reverse is also true: a scheme that fills up, or adds summer letting, buys more of the expensive energy. Model energy per occupied bed, in kilowatt-hours times price, never as a line copied from last year's accounts. The full cost base, and why utilities belong with variable costs, is in how to calculate student housing NOI.
The second mistake is the opposite one: reading the 8.9 per cent fall in NOI as a fall in value. Ask first how many months stand between the shock and the next rate card, and whether the city will pay the rise.
The free workbook for this case includes an operating cost benchmark with the energy exposure, the lag before repricing and the level at which energy eats the fee, and the student housing model template carries the cost base into value.
The owner does. The rent is fixed for the tenancy and the bill is a cost of the scheme, so a tariff rise falls straight onto NOI. On an illustrative 450-bed scheme, energy costs £762 a bed, 9.5 per cent of revenue. A management fee charged on revenue does not move with it, so the operator is unaffected and the owner carries the whole rise.
Divide the extra cost per bed by the weeks sold and by one minus the fee rate, since the fee is charged on the extra rent too. On an illustrative scheme, £442 a bed over 44 weeks at 97 per cent occupancy and an 8 per cent fee needs £11.26 a week, a 6.1 per cent rise. A doubling of energy prices would need 10.5 per cent.
Only the part the rent cannot recover. Student rent rolls are re-sold every year, so a rise the market can bear is repriced within one cycle. On the illustrative scheme, capitalising £199,044 at 5.25 per cent takes £3,791,314 off value, while the 11 months before the next rate card cost £182,457.
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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