Student accommodation development finance

Lending criteria for a PBSA scheme

Development lenders fund experienced developers and operators, or first-timers who bring in the right team. They want planning consent in place or close to it, a fixed-price or well-controlled build contract, a credible contractor with a track record on similar buildings, and a realistic programme with contingency. For a PBSA scheme they look hard at the operator and the local market, because the exit depends on the scheme letting: a demand study showing the city can absorb the beds carries real weight, and the strongest cases sit in undersupplied markets where Savills records ratios around three students per bed. They expect the developer to commit meaningful equity, usually 30 to 40 percent of cost, so the borrower has skin in the game, and they assess the planned exit route from the outset, whether that is a sale, a forward purchaser or a refinance onto investment debt. We package the scheme, the team and the demand evidence so the lender has confidence the scheme will be built on budget and let on plan.

Loan to cost, loan to GDV and the capital stack

Development lenders work to two limits and lend to the lower of the two. Loan to cost (LTC) is the share of total project cost they will fund, indicatively up to 60 to 70 percent, with the developer providing the balance as equity. The second limit caps the loan at around 60 to 65 percent of gross development value (GDV), the value of the finished, let scheme, which protects the lender against an over-optimistic appraisal. On a strong scheme a mezzanine layer behind the senior facility can lift total leverage toward 80 to 90 percent of cost, reducing the developer's cash requirement. The achievable loan therefore depends as much on the projected GDV, driven by the bed count, the rents and the city, as on the build cost. We model both limits and the full capital stack from the appraisal so you know your true equity requirement before you commit. All bands are illustrative, vary by lender and scheme, are subject to principal sign-off and are not an offer.

Costs, fees and drawdowns

Development finance is priced for risk and is dearer than an investment loan, typically a margin over SONIA with interest rolled up and added to the loan rather than serviced monthly, then repaid on exit. Expect a lender arrangement fee of around 1 to 2 percent, an exit fee on some facilities, a monitoring surveyor's cost for the staged drawdowns, a valuation reporting on cost and GDV, and legal fees for both sides. Because interest rolls up, the length of the build and lease-up period drives the total finance cost, so a tight, well-run programme saves real money. Drawdowns are released in arrears against the surveyor's certificates, so the developer funds the early works and the facility reimburses as the build progresses. We disclose our broker fee in writing, compare facilities on total cost to exit rather than the headline margin, and never claim an exclusive tie to any lender.

Development finance, bridging or forward funding

Development finance is the right product when you are building or converting and the scheme does not yet produce income. Once the scheme reaches practical completion and begins to let, it moves off the development facility, either onto stabilisation finance while occupancy builds or straight onto an investment term loan if it lets quickly. If you need to secure the site before the development facility is in place, for an auction or a competitive purchase, bridging finance can fund the acquisition and roll into the development loan. The alternative to funding the build yourself is forward funding, where an institutional investor buys the scheme before it is built and funds construction in stages, taking the asset on practical completion, which removes the development debt entirely. We plan the route from site to stabilised scheme so each stage uses the right money at the right price.