19 May 2025
Purpose-Built Student Accommodation (PBSA)
The consequence of delays to PBSA projects and how delay in start-up insurance can help protect against the substantial financial impact.
Great opportunities with unique risks
According to Savills, over the past five years, the UK Purpose Built Student Accommodation (PBSA) sector’s annual investment volumes have averaged GBP4.9 billion, with investment reaching GBP3.5 billion in 2024, marking a 13% increase from 2023.
Despite this recent investment, there continues to be a shortage of PBSA, which stems from growing numbers of school leavers, higher university participation rates, and an influx of international students, creating high demand in specific locations.
The number of undergraduates accepted onto university courses in the UK for the 2024 academic cycle was up by 2% year-on-year, according to the latest end-of-cycle data from UCAS. The number of domestic student acceptances climbed by 3%, largely driven by an increase in UK 18-year-olds. International student numbers were marginally lower year-on-year, having fallen by 2%, albeit they remain up over the long term.
UK Purpose Built Student Accommodation (PBSA) sector’s annual investment volumes have averaged
Risk
Whilst PBSA continues to be an expanding sector, with plenty of investment opportunities, PBSA projects come with unique risks - one such sector-specific risk being the increased potential for loss of rental income and, in some cases, additional financial costs if the project does not complete on time.
There is an intrinsic requirement for PBSA projects to be completed in good time for the start of the next academic year. Missing the completion deadline means that the business results will be affected to some degree until at least the start of the next academic year, irrespective of whether the actual project delay is a much shorter period - a short delay could have a disproportionate effect on the business.
Loss of rental income can, to some extent, be mitigated if the delay is identified far enough in advance of the scheduled completion date and prior to the annual student leasing window. With adequate planning, it may be possible to recoup some of the lost rental income through short co-living leases or summer lettings. However, for externally financed projects, there will also be additional debt service costs because of the elongation of the repayment term.
If the delay unexpectedly manifests shortly before completion and the start of the academic year, for example, due to damaged works, the financial impact to the owner or developer could include additional costs such as alternative accommodation and compensation to students to cover increased travel, subsistence and laundry costs.
All developers, including self-developing education providers, need to take these risk into consideration but, where developers are entering into contractual arrangements such as Forward Funding, Development or Partnering Agreements with education establishments and investment owners, these contracts may also include liquidated damages type late completion payments at pre-set value per unavailable unit, as well as void rent compensation or ‘take’ agreements which dictate that a completed facility cannot be handed over until a specific date.
Ultimately, the financial consequences of late completion will vary from project to project depending on various factors, including:
- The potential to minimise losses with interim short-term letting solutions
- The availability, cost, location and minimum term of suitable alternative accommodation options
- The conditions of the project contractual agreements
A thorough scenario-based risk analysis should be carried out.
This type of analysis will not only inform the project risk assessment and calculation of suitable levels of liquidated damages under the building contract but also form the basis of insurer discussions in relation to Delay in Start Up Insurance.
Delay in Start Up Insurance
Delay in Start Up insurance indemnifies the project stakeholders, owner, developer or lender for financial losses and/or additional costs incurred due to delayed project completion because of damage to the works, when liquidated damages are either not available from the contractor or insufficient to provide full reimbursement.
The conditions of most standard Building Contract forms will provide the contractor with an extension of time, and therefore relief from liquidated damages payments, when the delay event is caused by accidental damage or a specified peril – specified perils would usually include fire, lightning, explosion, earthquake, flood, escape of water and impact by aircraft. It is less common for Contractors to receive relief for other damage events within their control, such as damage resulting from design materials or workmanship defects, but the total damages payable will often be capped as part of the commercial negotiation between the parties and may not provide adequate compensation to the developer.
To protect repayments, Delay in Start-Up insurance is a standard prerequisite of loan agreements on externally financed projects and given the heightened financial risks specifically associated with PBSA project delay, should form part of any stakeholder’s due diligence considerations.
As well as the scenario-based risk analysis DSU insurers will be interested in any contingency within the construction programme, lead times for any completion critical items of plant, such as lifts, sectional completions, target occupancy levels and any operational inter-reliance, for example building maintenance plant located within in a single building which services other parts of the estate.
Another key concern for DSU insurers is the availability of funds to ensure that any repair or reinstatement works can be carried out in a timely manner to get the project back on track. For this reason, Delay in Start Up insurance must be bought in conjunction with the Construction ‘All Risks’ Insurance as part of an Owner Controlled Insurance ‘OCIP’ insurance programme – it cannot be bought on a stand-alone basis.
The nuances of Delay Start-up insurance combined with the unique completion risks for PBSA projects mean it is essential to engage a specialist insurance broker experienced in negotiating bespoke insurance coverage who can ensure that the risk and any mitigation factors are clearly communicated to insurers.
Gallagher has a team within their Speciality Construction division specifically dedicated to providing tailored advice and insurance solutions to owners and developers, including many PBSA developers.
The Gallagher team can:
· Advise on contractual risk transfer and liaise with project legal advisers
· Assist with the scenario-based risk analysis
· Design and negotiate a ‘fit for purpose’ bespoke Delay in Start Up policy wording that aligns with the project’s delay risk profile and responds as intended
· Liaise with external financiers and their due diligence consultants
· Provide insight into the benefits of an OCIP, including the control, certainty, transparency, and multi-stakeholder interest advantages this insurance route brings to any project
· Guide owners and developers on other insurable and uninsurable project risks such as third-party risks, title, rights to light or other legal indemnity issues, latent defects and environmental and pollution concerns
The key to getting the best from any project insurance programme is always collaboration and early engagement with the broker, ideally at the pre-contract tender stage.
Early engagement is essential for more complex projects involving refurbishment, retained structures, modern methods of construction or timber/hybrid designs, as well as projects near third-party infrastructure assets such as rail or below-ground structures where third-party asset protection or build-over agreements are required.
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