As the Basel 3.1 regulations edge closer towards full implementation, the purpose-built student accommodation (PBSA) sector faces a significant shift in how these assets are classified and financed. Mike Feasey, Relationship Director at Secure Trust Bank (STB) Real Estate Finance, discusses the changes and potential impact on various stakeholders.
While it sounds like a scoreline from the Swiss Super League, Basel 3.1 is set to have far more of an impact on the PBSA sector than a goal from Xherdan Shaqiri might. Basel 3.1 is instead the latest iteration of a framework introduced in response to the 2008 financial crisis, with the aim of strengthening the regulation, supervision and risk management of banks across the globe.
Here in the UK, the Prudential Regulation Authority (PRA) has set out a phased timeline for its implementation. From January 2027, firms must begin full compliance with standards, and by January 2030, all relevant institutions are expected to be fully aligned with the Basel 3.1 framework.
This might sound like just a banking issue, but the framework could actually reshape the PBSA market for years to come.
Real estate finance reclassified
PBSA has always been popular among investors, offering stable returns driven by strong demand from the growing student population. Under Basel 3.1, however, the way these assets are treated by lenders is about to change dramatically. Unless a property can be resold as a standard residential dwelling in the event of a borrower default, it won't qualify as residential real estate. Instead, it will be reclassified as a commercial trading asset.
This reclassification is relevant to PBSA because most developments simply don't meet the criteria for residential resale. From small, single-occupancy rooms to communal facilities, the layout and design of PBSA properties are clearly tailored to student living. These features, while ideal for their intended purpose, make them unsuitable for conversion into homes and therefore ineligible for residential classification under the new rules.
It's not just PBSA that will be affected either - holiday lets and care homes will also be treated as commercial trading assets under this new framework.
A changing lending landscape
With PBSA no longer falling under the residential category, banks are starting to adjust how they structure and price loans against these assets. The key change is that lenders will be required to hold more capital when financing PBSA, which naturally increases the cost of lending.
For borrowers, this means that financing PBSA could become more expensive. The increased capital requirements for banks are likely to be reflected in higher interest rates or tighter lending terms. While this shouldn't necessarily signal a decline in appetite for PBSA investment, it does mean that operators and developers will need to factor in these changes when planning future projects or refinancing existing ones. There's a chance that students may end up footing the bill for these changes, particularly if increased financing costs are passed on through higher rents.
This shift may also lead to a rise in alternative lending solutions. Private equity-backed lenders may become more prominent in the space, stepping in to fill the gap potentially left by high street banks.
Sentiment shifts
While Basel 3.1 is set to transform the PBSA financial framework, wider market trends are already presenting challenges for the sector. There are growing signs of oversupply in key university cities, for instance, where the balance between supply and demand is beginning to shift.
Nottingham, for instance, saw the vacancy rate for PBSA rise from 3.5% in 2023 to 11.2% in 2024 - the highest figure recorded since the city's PBSA occupancy survey began over a decade ago. This sharp increase reflects a cooling in demand driven by a combination of factors, such as falling international student numbers and more students opting to stay at home owing to cost of living pressures.
Leeds has also seen a noticeable drop in valuations for some PBSA assets, suggesting that investor expectations may no longer align with market realities. In both cities, the surge in development over recent years, which is often aimed at attracting overseas students, has led to an oversaturation of high-spec studio flats with premium amenities. The reality, however, is that they fall outside of the typical domestic student's budget. This oversupply, combined with the upcoming changes under Basel 3.1, could place further pressure on asset values and investor returns. The challenge will be to navigate both regulatory and market headwinds while maintaining occupancy and affordability.
Planning for change
With less than 18 months until Basel 3.1 begins to take effect, the PBSA sector finds itself at a crossroads. The regulatory changes represent a major shift in how student accommodation is financed, valued and perceived by lenders.
Here at STB, we are seeing some investors approach financing conversations without an understanding of how this framework could affect their borrowing costs, asset classifications and long-term returns. In the long run, it's important that developers and investors don't discover the implications midway through a scheme and are met with unexpectedly high interest rates or revised lending terms.
PBSA has long been an attractive asset class. With the right awareness and planning, it can continue to thrive in a post-Basel 3.1 landscape, but the sector must begin to engage with its realities sooner rather than later.
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