Irwin Mitchell Real Estate Partner Examines Some Of The Possible Solutions
The coronavirus pandemic has placed student accommodation providers in a dire situation. Not only are accommodation providers looking at empty rooms this academic year, but 20/21 numbers are anticipated to see a drop of up to 30%.
In addition to the issues with existing student rentals, the pandemic is causing uncertainty around future term dates and application procedures. This, coupled with the predicted deep global recession and continued national and international travel disruption, has created a real risk that numbers of students starting and/or returning to UK universities after the summer will decrease, leaving student accommodation empty and providers with no income.
This coupled with the headache of ensuring that accommodation is fit for purpose and that accommodation allows sufficiently for social distancing for the coming academic year - surely more difficult in cluster flats, could all lead to a change in perception as to what has been known and understood to be a safe investment.
So, how could the Government help?
The British Property Foundation (BPF) issued a briefing to the government last month which highlighted how the student accommodation sector can be best supported by the Government and we echo those sentiments…but where is the response?
BPF made a number of key requests of the Government all of which are entirely logical and we concentrate and offer our support on three key requests:
1. Local Authorities should show flexibility from strict planning use conditions and allow student accommodation providers to use rooms for non-student uses.
Whilst students are not there, student accommodation could be used to accommodation other occupiers including key workers. Some providers have offered their schemes up for this purpose.
Local Authorities are often keen to introduce conditions when granting planning permissions restricting the use beyond occupation by students and we have worked on many schemes where strict requirements are imposed. However, such conditions will result in buildings being unoccupied. If providers are to survive during Covid-19 they must be allowed to offer their accommodation to other occupiers.
A number of accommodation providers are already seeking relaxation independently by liaising with Local Authorities, but this will lead to discrepancies between how such applications are dealt with. The BPF have requested the Government asks local authorities to be flexible during the pandemic so that any planning condition limiting occupation to students is not enforced in order to allow providers to put rooms to non-student use in the next academic year and over summer 2020 and 2021. BPF have also asked for relaxation of conditions for a year where schemes are delivered late as a result of labour and material shortages and strict timescales cannot be met as a result.
This is not unreasonable and BPF aren’t simply requiring retrospective changes to permissions, but a simple temporary relaxation so as to ensure that providers are able to use accommodation for non-student use. We fully support BPF in such request and government need to offer clear guidance to local authorities on the matter.
2. Exempt student accommodation providers from VAT charges and relax the Relevant Residential Purpose (“RRP”) VAT zero rating requirement
Accommodation providers can mitigate the loss of income by offering short term lettings to key workers or other occupiers. However, this could result in operators being classed at hotel operators and liable for VAT. BPF have therefore asked the Government to exempt all student accommodation providers from VAT charges and have come up with a convincing argument in response to concerns around lost revenues for the Treasury - without the exemption, its unlikely providers will be able to offer short-term lets at all for reasons they will simply be unviable.
Many operators will have claimed a VAT exemption for accommodation being constructed if the building is to be used solely for its RRP e.g. it will have 95% student use throughout the year. However if, due to Covid-19, providers diversify and accommodation is used for non-students, providers may incur a change of use VAT charge if it has been less than 10 years since the construction stage exemption was made and more than 5% is used for non-student use. Any such charge could have substantial implications and will undoubtedly mean occupation by non-students is unviable. The BPF has therefore asked the Government to relax the RRP VAT zero rating requirement for student use from 95% to 50% for at least the next year.
This is not an unfair request and Treasury isn’t likely to be able to make a convincing argument for the loss of income. Had it not been for Covid-19, accommodation providers surely wouldn’t be in a position of being forced to consider risking jeopardising the RRP status. Again, this ought to be a short-term easy give for Government – and so why a decision taking so long?
3. Legislate so that student accommodation providers cannot be charged council tax.
Students are exempt from council tax, but when a room becomes vacant the liability for council tax falls on the accommodation providers in the private sector. Whilst accommodation stands empty, providers will therefore be liable for substantially increased council tax bills which they wouldn’t have incurred where it not for Covid-19. The BPF quoted one accommodation provider likely to see an increase in council tax from £725,000 to £2,600,000 this year as a result of releasing its students from accommodation contracts.
The BPF requested that the Government change the legislation so that student accommodation providers cannot be charged council tax and whilst this change is being implemented, the BPF has also asked the Government to instruct local authorities not to collect council tax from providers.
If the rules aren’t relaxed for student accommodation providers, students run the risk of being asked to honour contracts and local authorities could potentially benefit from a windfall as a result of the current pandemic. How can this be right? The BPF are entirely right in this request.
We at Irwin Mitchell fully support the BPF’s briefing issued to the government on 8th April 2020. Because of existing planning conditions, VAT legislation and the council tax regime, private student accommodation providers are particularly vulnerable to the many challenges of Covid-19. If the sector is to survive and be ready to hit the ground running once business as usual (hopefully!) resumes, help from the Government is essential.
This article first appeared in CoStar on 27 May 2020.