Clueless people like myself, would nod profoundly at the mention of this mysterious entity, desperate to appear in the know. I first heard of Basel 3.1 earlier this year at the Class Foundation in Manchester and at the International Hospitality Investment Forum in Berlin, and since then, it has become a new consideration in our sector.
 
So, what is Basel 3.1? Like anyone seeking to understand something complex in as simple a manner as possible, I asked ChatGPT to describe Basel 3.1 in 40 words, and it provided the following: “Basel 3.1 is the UK’s version of Basel III reforms, standardising how banks measure risks and set capital. It reduces variability in risk models, making banks hold more consistent capital and improving financial system stability.”

Where Basel III hits a property portfolio

But what does that actually mean for those of us working in the commercial real estate finance sector? In short, banks are being forced to readjust their risk profiles for certain asset classes. And yes, you guessed it that PBSA is one of those affected.

You know those shiny glass towers springing up more often than new barber shops in city centres? They’re the types of commercial properties set to be affected by Basel 3.1. This new rule is not only going to change how they’re financed, but also how they’re operated.

As director at Turning Point Capital, my focus is capital advisory across BTR, PBSA and Hospitality. Day-to-day, I help investors secure the right terms for stretched senior development loans (up to 90% LTC) and the leveraged investment term loans that follow. These loan values are based on rental income and, crucially, the cost of borrowing.

With some banks already factoring in Basel 3.1 to borrowing costs by over 100bps for term products, I expect the same trend for development finance in the coming years. Consequent reductions in the bottom line will make higher leveraged loans less likely.

Basel 3.1 pushes lenders to leave more capital in deals or to choose to drive up student rents or reduce amenities. Let’s be honest, by their very nature, investors will always find ways to hit their IRRs and recycle their capital.

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Remembering the (student accommodation) tenant

So what happens next? Do we see even more “value-add” amenities included in student accommodation to justify the increases in rent? Should we now expect student halls to come with on-demand cleaners, in-house salons and Michelin-star meals delivered to your door?

Or has the time come to offer something different? Rather than increase the amount of (arguably unnecessary) amenities, might it be time to reduce their amount in favour of offering students a more affordable alternative?

There is obvious justification for this choice. Back in 2004, I studied International Management at the University of Manchester, living at Victoria Halls on Upper Brook Street. Eight blocks facing onto a “courtyard,” which was basically a car park full of Renault Clios and Citroën Saxos.  As for amenities? Almost none. Actually, that isn’t entirely true. Our halls had five picnic benches dotted across the site and offered access to a bar at our sister halls where doubles cost £1.90. For £71 per week, I had my own en-suite room. Our flat had running water, a fridge freeze, and a washing machine. The building even had a lift! Most evenings were spent huddled around a tiny TV playing FIFA.

Were we happy? Absolutely.  I know this because I’m still close friends with the same group of people 20 years later. And I can assure you, when we speak of our times spent together in halls, it is not the amenities, or their lack thereof, that are the focus of our conversations.

Another question to consider is whether amenities now gone too far or whether the likes of Greystar can push them even further? With rents already exceeding £300 per week in some cities, the key question becomes how much further can investors stretch students’ wallets?

The reality is PBSA operators need to look closely at student spending habits. Some costs, for a haircut or a personal trainer, students will pay regardless. That’s where “bolt-on” amenities may still succeed, especially for the more affluent and less price-sensitive market.

But for the majority, I wonder whether students would now prefer lower rents over access to podcast studios and golf simulators that go unused.

These are the questions brought to the forefront as lenders confront the challenges faced by Basel 3.1. With the aforementioned challenges, I still believe that it will still be possible for the PBSA sector to offer bang for its buck, although sadly, the £1.90 double vodka and Coke are long gone.