The discount a university quotes is a weekly one; the discount it takes is annual.
A nomination agreement quoted at 8.8 per cent off the weekly rate is a 21.2 per cent discount, because it runs 38 weeks where a direct let runs 44. On 130 beds collecting £158.19 a week, the 6 weeks nobody pays for are worth £112,531 a year. Measured against expected direct-let income rather than perfect income, the whole premium is £153,568 a year — and capitalised at the deal yield it costs £2.6 million of value.
Worked in full in Student Housing Real Estate by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
A university offers to take 130 of a scheme's 520 beds. It will guarantee them for 5 years, pay whether or not they are filled, and deal with the students itself. In exchange it wants 8.8 per cent off the rate.
A direct let on this building runs 44 weeks. The nomination runs 38. The rate discount is quoted per week, so the annual discount is the rate cut plus the 6 weeks that are simply not paid for. At the same weekly rate, that difference on its own is 13.6 per cent of annual income.
| Per nominated bed | Direct let | Nomination |
|---|---|---|
| Rate per week, collected | £158.19 | £144.27 |
| Weeks | 44 | 38 |
| Annual, per bed, if fully let | £6,960 | £5,482 |
| Annual, per bed, expected | £6,664 | £5,482 |
Struck on the direct let's gross annual rent — every bed full, every bed paying — the real discount is 21.2 per cent, not 8.8. Struck against expected direct income it is 17.7 per cent. The two bases differ by 3.5 points. The larger figure is the one the sector quotes and the one that makes the point about weeks; the smaller is the one to carry into a valuation, because a nomination replaces risked income, not perfect income.
A university places first-years at a rate it must publish in February, so it asks for the cheapest product. Here that is the two cluster ensuite types — 130 beds drawn from the 310 in that range, collecting £158.19 a week. The building's blended collected rate is £181.35, which is 14.6 per cent higher and the wrong benchmark.
Benchmark the offer against the building average and the premium computes at £280,375 instead of £153,568 — overstated by 83 per cent. The error lands on the difference, not on the level, which is why a rate gap that sounds small is not. After the weeks, it is the commonest mistake in this negotiation.
Priced properly, against expected direct-let income on those beds, the nomination gives up £1,181 per bed per year, or £153,568 across the block. Of that, £112,531 is the 6 weeks. The rate concession everybody argues about is the smaller half of the trade.
The premium buys insurance, and insurance has a break-even. The nomination pays if direct-let occupancy on those beds would have fallen below 79.6 per cent. Above that line the certainty was not needed; below it, the university is the better customer. At 96.8 per cent, direct letting wins by £153,568 a year.
But 79.6 per cent is not a catastrophe. It is one poor September. The offer is not obviously mispriced; it is priced roughly where a counterparty that does this every year would price it. What the landlord buys is the removal of one September from the risk on 25.0 per cent of the beds, for 5 years. What the landlord sells is control. Nominated beds are allocated by the university, and the mix of students, the treatment of the building and the re-booking rate on the remaining beds are all affected. None of that appears in the rate.
One cost sits outside the arithmetic above. A 38-week nomination leaves 6 weeks at the end of the academic year in which those beds are the landlord's problem, when no student wants a bed and the summer programme has not started. In practice they are void, and they take 130 beds out of the summer inventory as well, because the changeover cannot be scheduled around them cleanly. The direction is clear: the real cost is somewhat higher than £153,568.
Capitalised, and with the management fee moving as it should, one line changes the building.
| The same building | Direct throughout | Nomination signed |
|---|---|---|
| Total revenue | £4.1 million | £4.0 million |
| Net operating income | £2.7 million | £2.6 million |
| Value at the deal yield of 5.45 per cent | £46.5 million | £43.9 million |
| Share of revenue that is contractual | 0.0 per cent | 18.0 per cent |
| Effect on value | — | −£2.6 million |
The offer costs £2.6 million of value and buys 18.0 per cent of the revenue in contract. A vendor will argue that contracted income deserves a keener yield, and the argument is a real one — so make it first, with a number attached. The nomination pays for itself if it tightens the yield by 30 basis points, from 5.45 per cent to 5.15 per cent on the same net initial yield convention. Whether a five-year university contract on that share of the income is worth that much is a matter for the buyer's own cost of capital, and it is now a question with a number in it rather than a feeling about covenant quality.
Three things to settle before the rate. The number of weeks, which is worth more than the rate and is usually conceded. Whether the agreement is a full guarantee or a marketing arrangement with a minimum — the difference is the entire value of the contract, and the drafting is often ambiguous. And the indexation, which over 5 years compounds, so an uncapped index is worth more than a point of rate today. Ask for the document before exclusivity: whether a nomination is in place, on which beds, for how many weeks, until when, and whether it guarantees or merely markets are five facts that sit in one agreement and move the value of a building by several million pounds.
This one runs 38 weeks against a direct let of 44. At the same weekly rate, those 6 weeks are 13.6 per cent of annual income, and they are the reason a discount quoted at 8.8 per cent off the rate arrives as 21.2 per cent off the year. On 130 beds the weeks alone are worth £112,531.
Below 79.6 per cent. That is the direct-let occupancy on the nominated beds at which the guaranteed income matches the risked income. At the 96.8 per cent this building achieves, direct letting wins by £153,568 a year. But 79.6 per cent is one poor September, not a catastrophe.
The rate on the beds being nominated, not the building blend. Universities take the cheapest product, here collecting £158.19 a week against a blended £181.35 — 14.6 per cent higher. Benchmarking against the blend prices the premium at £280,375 instead of £153,568, overstating it by 83 per cent.
This article is one calculation from Student Housing Real Estate. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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