Gavin Eustace

An interview with Gavin Eustace: 'It's important that developers look at new ways to stand out' in PBSA

In an interview with Development Finance Today, Gavin Eustace, head of residential development at Octopus Real Estate, discusses its latest purpose-built student accommodation (PBSA) report and underserved areas of the development finance market.

You recently released your Student Accommodation Impact Report. Why does PBSA stand out to you as an area which requires more attention?

In 2018/19, the number of full-time university students outweighed PBSA bed spaces by 3:1. We believe the student accommodation sector will continue to expand in line with full-time student numbers and there’s a huge opportunity for developers, especially as older accommodation, which has poor technology and facilities, needs to be redeveloped.

The sector is well researched on the investor and developer front, with a large body of analysis from think-tanks, agents and law firms. However, changes are being driven by the attitudes of the end customer: the students. It’s crucial to understand what they want from PBSA.

As a relatively mature market, it’s important that developers look at new ways to stand out. Our research shows that PBSA is good for grades, so evidencing this to students as well as providing them accommodation with great technology, work areas and social events will help them stay in PBSA throughout their years at university.

Do you think there will be an influx of lenders entering the PBSA market? If so, why?

PBSA is becoming more established as an alternative asset class and developers/operators are able to demonstrate their track record on the main variables. This makes it easier for lenders to underwrite the deals, and we do expect more lending into the sector. However, understanding the asset class is key to offering the best debt structure and it will take time for new lenders to understand the technical details in order to be truly competitive.

What areas of the property development market do you believe are underserved and why?

Smaller developers: a group Octopus specialises in lending to. These developers struggle to gain access to mainstream bank lending, and this is where Octopus Real Estate can step in with bespoke lending products executed over a short time span. We have provided around £1bn to the SME development sector over the past few years and remain committed to expanding further.

Another interesting area is build-to-rent, which is a few years behind PBSA in terms of track record, and this makes some lenders nervous about backing the sector. We take a bolder approach and believe in the fundamentals driving the sector (lack of purpose-built, high-quality rental stock) and believe this will be a growth area in UK residential over the next few years.

What do you think will be the biggest challenges for the development market this year?

Getting planning permission is always difficult for developers, where it can either take a long time to achieve or conditions attached to the consent may squeeze the economic viability. Clearly transaction volumes remain below previous levels and this will continue to impact on certain aspects of the market. Finally, construction costs are on the rise and the impacts of Brexit will need to be closely monitored. All that said, we remain confident in the sector and find that our borrowers who are building well-priced, liquid units are continuing to do well. 

What one thing would you like to change about the property development industry?

The planning permission system. It lacks consistency, is slow and isn’t really fit to support our current shortage of housing stock. I would like to see a much faster process, where planners are working with developers to ensure the right schemes can get consented quickly and built out.

How did you get into the industry?

I joined Bank of Scotland corporate graduate scheme some 15 years ago and one of my rotations was in the real estate team. I really enjoyed the part where finance meets the real world and you can get away from the spreadsheets and see what is being built. I particularly enjoyed climbing up part-built sites and seeing how they come together and watching the evolution as it becomes someone’s home.

If you weren’t in the industry, what would you be doing?

I’d be a science teacher — I studied biology at university and loved the subject, so I’d probably be doing that.

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