It’s been referred to as the best performing UK asset class in recent years, but is student property investment really a fast route to financial returns or just a fantasy?
There are a few high-profile articles such as this one which warns of the perils of investing in this sector, yet there still appears to be huge demand – institutional investors spent more than £4.3bn buying 51,150 student rooms in the UK last year, as reported by The Guardian. This article sets out what you can expect from your investment both positive and negative, enabling you to consider both sides of the coin and make an informed decision.
And whilst we’ll outline both advantages and disadvantages, please keep in mind that whether Purpose Built Student Accommodation (PBSA) is a good investment, or not, depends entirely on the investor’s personal requirements and objectives, as well as the project specifics including the market in which the scheme is operating.
With that caveat out of the way, let’s look at some of the advantages of investing in student accommodation.
Advantages of investing in student property
No Stamp Duty
With the entry level of Student Accommodation typically being below £125k, investors will pay no Stamp Duty rates as introduced by The Finance Act 2016, exceptions do apply.
Higher/Longer Assured Returns
New build buy-to-lets tend to come with 0-3 year assured rental returns, both to incentivise investors and to allow large quantities of units to be absorbed into a market without flooding and owners suffering from long voids. With Student Accommodation you will find the yield percentage to be higher and typically for a longer period. It is not uncommon for developers to offer 8-10% NET returns for up to 5 years, this is the headline attraction for many investors.
Student developers will normally appoint a dedicated student accommodation management company to effectively run the entire site. This includes the sales process of letting the properties, managing the entire tenant lifecycle and maintaining both the rooms/apartments and communal areas of the building. You will find the rate is a lot higher than high street agents for regular residential properties, but due to the extensive communal facilities and inclusive pricing model, it is normally justified.
You will still find that in most University cities across the UK there is a critical shortage of student accommodation. Many universities have just a couple of thousand dedicated halls of residence rooms, with the remaining students having to go into the residential market, mostly house-shares. However, this isn’t the case for every city.
PBSA is more expensive for the prospective students than traditional options but the inclusive agreement and onsite facilities are a huge attraction, bills and Wi-Fi are typically included making it a convenient option. Prime locations, social areas, meeting rooms, gyms, cinema rooms, rooftop terraces, cafes, bars and often a dedicated social program also drive demand. With parents often being a big part of the decision-making process (and paying of course) – onsite 24/7 security, approachable site management teams, secure key card systems and an efficient maintenance service often mean the parents favour these dedicated student properties. From an investor’s perspective, having a quality product in comparison to market alternatives will bring in the rental income.
There are far more positive articles and statistics to support the investment than negative. Major research-focused organisations such as Savills and Knight Frank often report positive data for the market. The following are some examples from this year alone – Headline rental growth for purpose built student accommodation increased by 2.55% for the 2017/18 academic year according to Knight Frank here. The market has a £46bn total value as the Guardian reported here and even Brexit may have intensified appetite for UK student housing. The UK saw over £2.1bn transacted after the referendum, compared to £1.9bn earlier in the year – Savills reported.
Disadvantages of investing in student property
If you’re more of the glass half empty type, here are the disadvantages which you need to consider before investing:
No Finance Available
There is no finance available for student accommodation projects, most main stream lenders will not lend against this asset class.
This is one of the main disadvantages of student accommodation. Investors need to be aware that you will not see the same increase in property value year on year as you would with a typical buy to let property. Of course, this will vary from market to market and project to project, but the general rule of thumb is that if you are mostly focused on strong capital growth, then perhaps stick to residential property investment.
Another key factor to consider is your resale market. When you come to exit and want to sell on the property, you will only be able to sell to a cash investor, not an end user. This restricts your options drastically.
‘Assured return’ effectively means contractually guaranteed, which is where the developer will provide a contract stating the agreed return. However, in the rare case the developer goes bust your contract won’t be worth much as ultimately the developer won’t have funds to pay investors. Although problems are rare, you should ensure projected rents are realistic and provide an attractive return after ground rent, service charges and management fees, this will ensure you’re less reliant on the assurance.
The popularity has rocketed in the UK in terms of demand from tenants and developers to build student accommodation. In fact, there are 25,000 bedrooms to be built before the 17/18 academic year as mentioned here and £5.3bn is expected to be injected into purpose-built student accommodation in 2017 – see here.
There is certainly no lack of investors ready to snap up the student ‘pods’ or self-contained apartments, which, by the way, are far superior in quality compared to the old-fashioned halls of residence traditionally associated with university accommodation.
The new breed of student halls is here to stay for the long term. If you are looking for a fully managed option, high rental return, happy to buy with cash and not achieve extensive growth, then a property in this asset class could make a fantastic addition to your portfolio.
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