The UK’s purpose-built student accommodation (PBSA) sector is under intense pressure to meet increasing demand, driven by rising student numbers and limited affordable housing options in university towns and cities. However, PBSA projects also face unique risks, particularly during the construction phase, when delays can disrupt academic year timelines, leading to financial losses far beyond typical construction projects.
The completion of PBSA projects is usually tied to a specific academic year. Thus, a small delay beyond the start of the academic year has the potential to trigger a far greater loss than would be experienced on a residential flat development, for example. This is due to the nature of the contractual relationship between the owner and the student tenants upon whom the owner relies for their future income stream. For instance, failure to deliver the agreed accommodation on time may require the owner to provide alternative accommodation for those students, and/or transport or food vouchers, all at significant additional cost. All these additional costs will require consideration and understanding when calculating the financial consequences of any delay.
Financial impact of construction delays
Various contractual arrangements may be agreed, but the following present two typical risk scenarios relating to the effects of construction delays on PBSA:
Due to unavailability of the building, the students are forced to find alternative accommodation for the forthcoming academic year. Alternative accommodation (houses/flats etc.) may only be available for a minimum 12-month rental period. Where students have no choice but to find alternative accommodation for the full year, this leaves the owner facing a shortfall in expected rental income for the whole 12-month period. This is a good example of how a relatively small delay can lead to a far greater loss over a longer period.
Instead, the owner may have contracted to find alternative accommodation for those students during the period of delay. This clearly has an additional benefit in that it limits the potential length of any loss and ensures the students will be able to move in when the building is eventually completed. However, this places additional burden on the owner as they will likely be searching for accommodation in the same market as the students, and short-term accommodation, such as hotels, may be subject to far higher rental rates than would typically be paid by students for the original accommodation. The alternative accommodation may also create further costs for the students (travel, food etc.) which the owner may need to pay for to mitigate their financial position, rather than lose the rental for the full year.
Mitigating the cost of delays
Given these complexities, tailored insurance solutions are vital to protect developers and investors during construction. Bespoke policies, such as Contractors All Risks (CAR) coverage combined with Delay in Start-Up (DSU) or Advanced Loss of Profits (ALOP) insurance, are essential for mitigating the financial impact of delays. This approach ensures that developers are covered for revenue risks and additional costs associated with construction setbacks, safeguarding the project's financial stability, and aligning with the sector’s unique seasonal demands.
Key considerations
The DSU indemnity period is usually calculated based on the expected rebuild period, plus any further contingencies. There are no set rules around this, and each owner must decide based on their individual risk appetite. In terms of alternate student accommodation costs, these are typically only considered for the first 12 months of delay, given that contingencies and alternative accommodation can be put in place should there be a greater delay.
Understanding the alternative accommodation options and the basis upon which the sum insured has been calculated requires full transparency when approaching insurers at quotation stage. They will want to understand the mitigation strategies that are in place, including any ‘float’ in the construction period, together with the expected completion date. Underwriters will consider all these factors when calculating the premium rate.
Finally, it is important to ensure that the wording properly reflects the cover required for your project. Where a relatively small delay could trigger a loss for a longer period, this should be discussed and, agreed at the outset of the policy. Similarly, if a risk can be mitigated then this should be made clear to your insurers. Otherwise, they may assume, and charge, for the worst-case scenario.
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