With more than 200,000 university bed spaces in England alone, one for every first-year undergraduate not living at home, student residences are big business. A further 11,000 spaces are under construction. When institutions were asked what their proposals were for major building projects, residences came top of the list.

The traditional view is that they are self-financing and look after themselves. But institutions are asking whether it will continue to be viable to provide them.

Most institutions have increased supply to match the growth in student numbers, to improve quality and to keep up with, or get ahead of, the competition. Residences and catering operations account for around 7 per cent of an institution's expenditure. But the outcome of the Dearing inquiry could mean changes in student numbers and recruitment patterns. What if there is a push to regionally-based provision? Should institutions reduce the number of bed spaces they own and increase short-term leasing arrangements?

Students' expectations of the amount, quality and type of residential provision are widely viewed as influencing recruitment patterns. Some undergraduates want good-quality rooms with their own bathroom, while for others quality is much less important than low cost. What students want also affects the way accommodation is managed.

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It already looks as though there will not be enough rooms to go around. Much accommodation from the 1960s and 1970s is nearing the end of its life expectancy, with big financial consequences. The historic debt cost is probably very low and while this accommodation may be "self-financing" overall, nil or low-debt service costs may mask inefficiencies in operating arrangements. Often these buildings - single-sex halls of residence with shared bathrooms and refectory catering, for instance - do not meet modern demands. Institutions will need to consider whether to refurbish, demolish or replace them.

Some institutions are also facing the financial consequences of procurement and financing packages entered into during the massive building programme of the past five to ten years. Serious problems include unsustainably climbing rents. Occupancy levels assumed at the early stage of feasibility testing are not being achieved, often because students are renting cheaper privately. Some institutions are looking for alternative financial deals, a number considering using the private finance initiative for procurement or management.

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These issues have raised key management and funding policy questions. In a review last year Coventry University found that just under half its students wanted to live in university accommodation in their first year. The study highlighted the growth of private rented stock in which universities have a management role, usually in the form of annual leasing arrangements. Some deals on new developments involve leases with options to break at ten years or even less. The flexibility of these arrangements is very attractive. Coventry thinks it likely that it will expand its stock.

It will also be interesting to see how the University of Westminster progresses with its pathfinder private finance initiative project to take student accommodation debt off the balance sheet and reduce occupation and running cost risk. Because Westminster has a variety of off-campus locations in relatively attractive neighbourhoods there should be significant scope for achieving these aims.

The time bomb underneath student residences is beginning to tick. The sector should act now to investigate and defuse it, in case Dearing sets it off.

Sian Kilner and Jeremy Wilson work for the education team of property advisers Grimley.

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