UK Housing Sector growth
Triggered by the UK being the second most popular destination for international students, global investment into the UK housing sector is predicted to enjoy strong growth in the future, fuelling developments for student accommodation for rental purposes, which enjoy good revenue streams. However, there are pitfalls to avoid and this article highlights some common areas of risk when investing in student accommodation.
A recurring issue in student accommodation development is trying to obtain zero-rating eligibility so that VAT can be recovered. For example, a builder/developer charges VAT on the construction costs. The property owner tries to reclaim the VAT but HRMC states that no VAT should have been charged (as the builder/developer should have been zero-rated), so no VAT can be recovered. Therefore care with tax planning is required before a student housing development is commenced, so that VAT can be recovered on all construction costs and then it should be monitored going forward.
Investors should be aware that holding property in a Special Purpose Vehicle (SPV) is not always beneficial as the risks associated with it can sometimes outweigh the benefits. Transactional costs can often outweigh any tax saving particularly for smaller assets.
Timing of delivery of new schemes
Timing is a key element. If owners let out properties to students but fail to have the property ready for students to move into by the start of term, such delay may put the owner at risk of paying the students compensation under the “ANUK Code”’ (which regulates the provision of student accommodation).
Provision of services
The investor should be fully aware of the costs of building student accommodation including awareness that the main building contractor may not be responsible for installing furniture etc. Usually separate contracts will need to be entered into with suppliers. Therefore the building contract must be clear and state that suppliers may be present when the main works are going on. If suppliers disrupt the works of the main contractors, then it would be the investor client who would be responsible for the delays rather than the main contractor.
Snagging is the process of checking a new building for minor faults that need to be rectified. The development agreement/ building contract needs to have detailed provisions detailing what can constitute a snagging item and how the snagging item will be rectified by a contractor. Practical consideration must be given to how and when the contractor will be given access to the property if it is occupied.
Usually the buyer of student accommodation will look to protect themselves by obtaining a guarantee from the seller/developer regarding the first year’s lettings, meaning that if by the end of the first year rental income does not reach the target envisaged, the seller/developer will cover the purchaser’s loss by way of a rent guarantee. The drafting of this provision in the buying contract must be clear so that no disputes arise between the parties.
Operational Issues Defects
Rectification of defects can cause disruption to occupation, thereby increasing loss of rent and management costs, in addition to creating potentially long delays in carrying out such works. The building contract and any development agreement should therefore have a provision which ensures that the rectification of any works are not treated as mere snagging items, with tight control over the timing and method of rectification.
A lot of students go abroad during the summer meaning that there are many vacant student rooms/ properties. However, owners must check whether there are planning conditions restricting the use of the property during the summer period (i.e. preventing the letting to third parties other than as permitted e.g. conferences or visiting foreign students). Owners may need to obtain permission from the local authority and such permission is very hard to obtain to be able to let the rooms/ property to people other than students.
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