he continued upward trajectory in residential rents has been well documented in recent months across all media platforms, with specific focus on the shortage of student rental accommodation in recent weeks in the aftermath of Leaving Cert results and third level offers being received.
With a new crop of third level students entering into the residential accommodation market in Cork this week, it is timely to take a look at how this cohort of the population will be accommodated for the foreseeable future.
First though, we have to put the student accommodation market in context. Cork is a university city and has the second largest full-time student population in the Republic of Ireland, approximately 17,000 students are enrolled in UCC and 8,000 in CIT. Both institutions are ranked very highly by international standards — UCC has no less than 14 subject areas featuring in the top 300 globally and this type of quality education will ensure strong demand for its courses in the long term.
It is estimated 10% of the Cork student population is from overseas and 14% are enrolled in post graduate courses. Of the total population of 25,000, approximately 15,000 are estimated to be Cork students studying in the city, so in simple terms, about 10,000 students are non-resident to Cork and therefore make up a substantial part of the demand for student accommodation.
However, the demand for accommodation is actually higher, as it is not practical for all of the Cork students to commute on a daily basis. By looking at both demographics, we have undertaken a study to estimate the number of students who require, but are unable to access, purpose-built student accommodation.
The Higher Education Authority suggests that in 2015 there were 2,975 purpose-built, privately operated student bed spaces in Cork, with a further 813, university-operated spaces. With no actual delivery of purpose-built student beds since 2015, we can safely say that the figures have not changed in the intervening years.
As part of our study we looked at similar university cities across Ireland and the UK with similar demographics to Cork. According to our research, approximately 7,300 students require, but are currently unable to access, purpose built student accommodation in Cork.
While of little consolation to students commencing their studies in the next couple of weeks, change is on the way with a number of planning applications for student schemes submitted to Cork City Council in recent years. The trend for providing student accommodation has grown exponentially and in the past 12 months alone, there have been five planning applications which between them, have the potential to develop 1,653 student beds in due course.
As things currently stand there are eight student accommodation schemes with 2,384 beds at various stages of development and planning in Cork, a pattern which is summarised in the accompanying graph.
Unfortunately, despite the number of schemes in planning, only one (190 beds), is currently under construction. If in due course, all of the 2,384 beds are supplied into the market, (which is unlikely due to planning risk), there will still be a significant shortfall of 4,916 beds in Cork.
There is therefore clearly, headroom for more development in this specialist sector. With rental prices rising and yields (income capitalisation rates), compressing, the viability of these schemes is improving. Up until now, it has simply been uneconomic to build student accommodation, whereas in the past the sector was helped by investor tax breaks.
As viability improves, we can expect to see an increasing number of purpose-built student accommodation schemes being delivered. What is interesting about the current 190 beds under construction on Western Road, is that the site originally sold with the benefit of planning for 50 private apartments. On this basis the development of student beds must be more feasible but a comparative analysis is a subject in its own right.
A supply of sites will be required in order to serve the market and this is where the numbers have to stack for both the site owner and the student accommodation operator. So you may ask how does all this work? From the operator’s perspective, average weekly rents for ‘best in class’ new stock is being priced at around €160 to €235 per week for the 39-week academic year.
During the 12-week summer holiday season rates decrease significantly in order to attract summer students, although in some cases the operator can be left with vacant rooms. Operator margins are in the order of 70% to 75% of gross income before accounting for property costs.
End product values are established by capitalising the operators margin with a capitalisation yield. We have not yet seen any volume of going concern sales in the sector other than the redeveloped former Montrose Hotel in Dublin, which sold for €37.6m in February 2017. This sales price reflected a yield just shy of 6% and converts to a multiple of 16.7 times margin. From the end product value, the cost of construction is deducted, costs here can vary widely, depending on site conditions and specification, but can typically range anywhere from €60,000 to €80,000 per bed space.
The result is that the completed value of the bed space, less all development costs, now leaves a residual for site purchase. Within the Cork market the spread in site values is anywhere between €12,500 to €15,000 per bed space assuming full planning permission is in place for a well-designed and located scheme.
If owners are willing to sell sites for these figures then supply may very well grow to meet demand but the road is long and a €10 swing in weekly rates can be enough to decide the fate of a project.
Students in secondary school now can take some comfort in the fact that by the time they are going to third level and looking for student accommodation in Cork, there will be a much better supply of very high quality purpose-built student accommodation in the city.
In the meantime for the current crop of students who make it to Cork, they will first be met with the ‘university of life’ and the challenge of finding a bed space.