A quoted yield sits above capital expenditure, and student rooms wear out faster than almost any other real estate.
Annualise the refurbishment cycle, add the ongoing capital items and the summer income a refurbishment year gives up, then take the total off net operating income before dividing by the price. On an illustrative 450-bed scheme bought at a 5.50 per cent net initial yield, £800 a bed a year of capital expenditure and lost summer income takes 15.3 per cent of NOI and leaves a yield after capex of 4.66 per cent, 84 basis points lower.
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 →
Student housing wears out faster than almost any other real estate. Every room is moved into and out of every year, often by a new occupant, and an all-inclusive rent means the landlord also owns the fittings, the furniture and the plant behind them. A quoted yield is struck on net operating income, which by convention sits above capital expenditure, so the cost of keeping the rooms lettable is nowhere in it.
| Input | Value |
|---|---|
| Beds | 450 |
| Price / purchaser's costs | 40,000,000 / 6.8% |
| Total cost | 42,720,000 |
| Net operating income (5.50% on total cost) | 2,349,600 |
| Refurbishment of rooms and kitchens, per bed | 3,500 |
| Refurbishment cycle, years | 7 |
| Years since the last refurbishment | 3 |
| Ongoing capital items (plant, lifts, roofs, systems), per bed a year | 250 |
| Net summer income per bed, lost in a refurbishment year | 350 |
Net operating income is £5,221 a bed on a price of £88,889 a bed. The last input is the one most models leave out: refurbishment happens in the summer, the only window when the rooms are empty, so in a refurbishment year the building cannot also be let to summer groups.
Capex per bed a year = refurbishment ÷ cycle + ongoing items + summer income ÷ cycle
= 3,500 ÷ 7 + 250 + 350 ÷ 7 = 500 + 250 + 50 = £800
Yield after capex = (NOI − capex) ÷ total cost = (2,349,600 − 360,000) ÷ 42,720,000 = 4.66%
In Excel: =(NOI-Beds*(Refurb/Cycle+Ongoing+Summer/Cycle))/(Price*(1+Costs)).
| Line | Per bed | Scheme | Yield, bp |
|---|---|---|---|
| Refurbishment cycle, annualised | 500 | 225,000 | 53 |
| Ongoing capital items | 250 | 112,500 | 26 |
| Summer income lost in the cycle year | 50 | 22,500 | 5 |
| Total, capex and lost summer income | 800 | 360,000 | 84 |
The scheme bought at 5.50 per cent earns 4.66 per cent once it pays to stay lettable. Capital expenditure, with the summer income it displaces, absorbs 15.3 per cent of net operating income. Put the other way, a buyer who wanted 5.50 per cent after capex would pay 33,871,297 rather than 40,000,000, 6,128,703 less. That is not a bid: comparable yields in the market are quoted before capex too. It is the reason a student housing yield cannot be set beside an office or logistics yield, where the tenant bears most of the fit-out, without first taking the capex off.
The annual average also hides the shape of the spend. The refurbishment is not 225,000 a year; it is 1,575,000 once every seven years, 67 per cent of a year's net operating income. In that year the scheme generates 504,600 of cash after capital spend and the lost summer, against 2,237,100 in an ordinary year. A loan with a cash sweep or a distribution covenant tested annually will feel that year directly.
The buyer also inherits the position in the cycle. Three of the seven years have run since the last refurbishment, so three-sevenths of the next bill has already been consumed by the seller's occupants: 675,000, or 1,500 a bed. The next full refurbishment falls due in year four of the hold. Two schemes with the same net operating income, one refurbished last summer and one due next summer, are not worth the same, and a price struck on the yield alone treats them as if they were.
| Cycle | 2,500 | 3,500 | 4,500 |
|---|---|---|---|
| 5 years | 4.64% | 4.43% | 4.21% |
| 7 years | 4.81% | 4.66% | 4.51% |
| 10 years | 4.94% | 4.83% | 4.73% |
Capex per bed ranges from £535 on a cheap ten-year cycle to £1,220 on an expensive five-year one, and the yield after capex from 4.94 to 4.21 per cent. The cycle length matters as much as the cost: a scheme let to first-year undergraduates in cluster flats wears faster than one let to postgraduates in studios, so ask how often each room type was actually refurbished, not what the plan says.
The common mistake is a capex reserve set as a share of revenue, typically a round 2 per cent. On revenue of 3,555,000, 7,900 a bed, that is 71,100 a year, 158 a bed, and it reports a yield after capex of 5.33 per cent. It understates the true cost by 288,900 a year, because the cost of refurbishing a room is driven by the room, not by its rent. A reserve on revenue also falls when occupancy falls, exactly when the rooms most need spending on to let again.
Diligence check. Ask for the refurbishment history room type by room type, walk a room from each, and compare the year of the last refurbishment with the seller's capex budget. A budget that shows no refurbishment inside your hold, on a scheme three years into a seven-year cycle, is a budget that has been left for you.
The yield a student housing scheme earns is the one after capex: 4.66 per cent here on a 5.50 per cent purchase, with the refurbishment cycle carrying 53 of the 84 basis points and a 675,000 bill already part-consumed on the day of purchase. The free companion workbooks for the book annualise the cycle in the same three parts, and how to calculate student housing NOI builds the income line it is taken from.
Build it from the cycle rather than a percentage. A £3,500 refurbishment every seven years is £500 a bed a year; ongoing plant, lifts and roofs add £250 and the summer income lost in the refurbishment year £50, so £800 in all. On the cost and cycle ranges in the example the figure runs from £535 to £1,220 a bed.
The part of the next refurbishment already used up by the time the buyer takes over. Three years into a seven-year cycle on 450 beds at £3,500 a bed, three-sevenths of the bill, 675,000 or 1,500 a bed, has been consumed by the seller's occupants and will be paid by the buyer in year four.
Because refurbishment cost follows the rooms, not the rent. On revenue of 3,555,000 a 2 per cent reserve is 71,100 a year, 158 a bed, and shows a 5.33 per cent yield after capex. The cycle-based figure is 360,000, so the reserve understates the spend by 288,900 a year.
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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