Back in business school in the mid-’90s (yes, when little dinosaurs roamed the classroom), I liked financial cost accounting and the simplicity of its mathematical results for shareholder value: you sell something for more than it costs you, and you make a profit (ideally post taxes). This very basic concept of “making money” holds true in real estate development (cost to build vs. price of selling a building) and operation of student housing (cost to operate vs. apartment price students pay).
Back then, we briefly discussed the concept of external costs (or benefits), which often did not make it into these calculations. If you look up a definition of these also called externalities, you find “economics concept of uncompensated social or environmental effects”.
For example: when you buy car fuel, you (usually) pay the cost of production (an internal cost), not or not to the full extent the cost of burning that fuel like air pollution (external cost). If those external costs are all priced in, the results of the profit calculation would look quite different. These inputs drive results.
Is it still so simple?
Nowadays, ESG is popular – most businesses, including real estate players, use Environmental, Social, and Governance criteria to measure performance in key business areas – especially to mitigate negative risks such as air pollution, hazardous material, cradle-to-cradle etc.
Stakeholders, like governments, policy makers and the public, which is comprised of academics, parents, and students, are putting pressure on businesses to do more good. This means creating social value. Social value measures the positive value businesses create for the economy, communities, and society. Importantly, advisory businesses are working on having results you can measure, meaning transparent figures that can be checked and put into these fancy profit spreadsheets.
I do believe that people in general have a great, intuitive appreciation of the difference between price and value (and it is not only Warren Buffet who claims “price is what you pay; value is what you get”). Recently, during the pandemic, the enormous contribution, dedication, and social value of workers in the social and health sector became very apparent and at the same time, their low salaries — price! — became evident.
During that time I realised that you prefer to have your kids in overseas PBSA where an extremely stretched but hard-working student housing operations team is trying to take care of their everyday needs and their mental well-being bye best they can by organising some support and activities. Something your “old landlady” might not be able to do in privately rented accommodation.
Social Value Accounting
Thus, today, I welcome concepts of accounting for social and environmental value as a basis for proper decision-making, ways of working and – very importantly – sustainable resource allocation.
It is so essential for decision-making, to have a proper decision basis. Simple example: When an overseas friend asked me to help his nephew to find accommodation for his studies in Vienna, I immediately thought about PBSA options and put him in contact with local student housing operators. Why? Because I believed for a similar price, he will get a much better experience, and value for his money, in a PBSA that he will remember for all his life – being able to receive contacts, new friends, and communal activities.
Much more value than living alone in a flat in a foreign city and struggling to make contacts with other students or neighbours. But social value is not only important for students, but also for parents, developers, investors, operators and municipalities. Social value is the value that stakeholders experience through changes in their lives. Some, but not all value is captured in market prices.
This begs the question; in practice, is social value accounting creeping into investor decision-making? It is starting to. Your usual “forty-page” Investment Memo on new developments would have at least one or two pages on environmental standards and another on the social impact of the business – maybe not yet in quantified numbers in otherwise highly sophisticated Excel spreadsheets but at least with qualitative or anecdotal evidence.
This will continue and accelerate. The European Union has helped as well with its taxonomy initiative to encourage sustainable growth– environmental and social externalities become much more relevant. Suddenly, you get green bonds, social bonds as well as sustainable (green and social) bonds, loans, and investments. These sustainable practices need to be measured and reported and have become a “must have” requirement for attracting retail investments. A major step ahead. Suddenly “Manage to ESG (Environmental Social Governance Investment Criteria)” strategies pop up as investment plays with older student housing.
Basically, attracting investment to improve the value of the building (and possibly operations) to achieve better returns because a higher value product that conforms to ESG criteria will achieve a better selling price (which finances the capital expenditure required). Don't you love the simplicity of holistic profit calculations to drive behaviour?
Looking Ahead for PBSA
Investors, developers, and PBSA operators who expand their business and remain long-term profitable and successful will be those who create social value and have an objective, trustworthy means to measure and communicate it. Developers working with the local stakeholders (academics, students, entrepreneurs, businesses, and residents) will be able to create projects that not only tick the ESG boxes but are also perceived to do good.
It seems the UK, being one of the most mature markets in Europe, leads the way in student research and studies of social value and its impact. Charities and advisory professionals come up with principles of social value and it has become a criterion in tenders, developments, and operations. Information will be as easily available as finding out where your organic coffee beans come from — by checking QR codes on the packets.