The Benefits of Investing in Student Accommodation
Purpose built student accommodation (PBSA) is an investment sector that is developing into a wealth-building strategy that outperforms many other types of property investment within the UK. It is an investment strategy that is certainly worth a closer look whether you are a beginner in property investment, or an experienced investor looking to expand your existing portfolio.
The number of students studying in UK educational establishments is increasing year on year and with this continuing increase comes a higher demand for purpose-built student accommodation. University populations in the UK have grown due to the increasing demand for places from overseas students as well as the looser restrictions on the number of places that each university can hold.
As a property investor who is looking to get the best returns from an investment, it would be smart to think about taking advantage of this high-demand opportunity by investing in a top-quality student accommodation property.
There are multiple benefits to investing in a PBSA and in recent years student accommodation has definitely risen from a niche asset class to a more widely-known investment opportunity.
Student accommodation investments may appear as some kind of golden ticket because of the high yields on offer and the high demand for student housing. However, investors must be aware that there are always risks with any investment and there are some pitfalls in PBSA you need to consider.
In the media there have been a few high-profile cases featuring investors who were let-down and disappointed with the promise of assured rents with fixed returns that didn’t quite pan out as expected. However, there are many successful cases where the fixed returns and rental assurances are honoured, so do not feel too discouraged from the negative press surrounding this type of investment.
The bottom-line is; if you do not do your research on the developer, the development location, the city and the overall market conditions then you are asking for trouble in any property investment, not just PBSA. Investors that don’t do well are overwhelmingly those who haven’t done their due diligence.
What Exactly do I get with a PBSA investment
Understanding exactly what you are signing up to is as important for student accommodation investments as any property investment. A key factor that you will need to consider is the type of property you choose as there are a few popular categories of student accommodation that you can invest in. So, to begin, let’s review the different types of student property;
Student pods in PBSAs consist of single rooms within a student block. They have shared facilities which include a kitchen and other facilities. Most of these student pod investments are sold off-plan and come fully managed. The main points are:
- Low cost of entry
- Hands off investment
- Assured rents with higher returns
- Resale potential only to other investors
- For cash buyers – can be difficult to find a student property mortgage
Self-Contained Student Apartments
These offer student bedrooms, a living room, small kitchen and en-suite within a single unit. It may come in blocks with shared facilities such as a gym or laundry services. The main points are:
- Off plan and fully managed
- Hands off investment
- Resale is easier – wider market
- Appeal to overseas market
- Development and management risks
The old model of renting out student accommodation was via HMOs (houses of multiple occupations), in which a single property is rented out to a number of individuals who share the facilities.
The main points are:
- Higher yields
- Cash-flow is higher
- Management time is longer
- Increased overheads – council tax and insurance is more expensive with an HMO
- HMO requires a license
- HMO is a residential property so will be liable for stamp duty and capital gains tax
So, whilst a traditional HMO can theoretically deliver higher yields the additional costs and the amount of work involved negate these advantages.
Investing in Student Accommodation
Investing in a student accommodation property can be a low-risk alternative compared to investments in traditional buy-to-let properties.
Student accommodations are often off-plan investments which are a huge benefit in itself – because off-plan properties are still under construction, the developer can offer you the property at a much lower cost than the real value of the property when the construction is completed. If you are going to buy the property off-plan, which means it is still in development, you will get a better deal on the buying price and your profits could be increased greatly because of this.
When you purchase off-plan, your student accommodation investment will typically be fully-managed by a property management company. A property manager can make sure that your property and your investment retains its value. Having your property managed by a property management company will ensure that every aspect of your property is being taken care of so you can be partially or completely hands-off.
The major benefit to this is that you will not have to worry or deal with the property maintenance, repairs, general day-to-day matters, tenant disputes or rent collection. A reliable property management company can attract and retain student tenants, therefore your student property investment, in theory, can be tenanted a year ahead of time.
Investors should look to buy a residence off-plan and take advantage of the early years’ greater than average rental income. Experts are predicting an annual increase of 3-5% in the student sector which indicates this is an area ripe for long-term investments.
This is especially true in areas that traditionally have a large student population within the UK such as Liverpool where the student demographic is still increasing. With this growth also comes the demand for better quality student accommodation for sale, so gaining tenants for PBSA is a lot easier in these locations and the chances of going for periods of time without a tenant are sharply reduced.
Student Property Investment Location – Is the area important?
If anything, the location of your student accommodation investment could be considered the most important part of your investment and thorough research into the location of your investment will help determine the success of your property investment.
Students want to have accommodation that is nearby to both their university campus and to the city centre. There are obviously going to be some areas that are more in demand for purpose-built or private student accommodation than others. The key to finding a good student property investment is to simply invest in an area where there are large numbers of students and in a development that is well-located within that area.
Traditional student hotspots can be found in university cities such as Sheffield, Liverpool and Huddersfield. Whilst London does have a large student population the cost of property makes these kinds of investments less affordable and less profitable in London and the best yields are currently found in more northerly cities.
The area in the town or city that the student accommodation is situated in and the distance it is to the educational establishment will all factor into the popularity of your investment and will, therefore, determine the returns you make. The most desirable student accommodation properties will be located close to the city centre and the university, to provide students with the best of both worlds. Being close to their university will allow them easy access and travel to their course of study and nearby city centres give students easy access to amenities such as restaurants, cafes, grocery shops, retail outlets and nightlife like bars and clubs.
If you do invest in the right area then your student accommodation property investment can turn out to be more rewarding because the property will be more advantageous to your target tenants – students.
Increasing Student Numbers Offer Long-Term Returns
In 2013 the UK Chancellor announced that the cap on the number of students permitted by UK universities was to rise by 30,000 in 2015. The cap was then removed altogether in 2016, which further increased the demand for high-specification student accommodation, in spite of a recent rise in university tuition fees. In addition to this, UCAS (the University and College Admissions Service) figures show that well over half a million students apply for university places year-on-year – great news for anyone thinking about student accommodation investments.
In regard to, foreign students for whom PBSA are a big draw since there is no cap on the number of overseas students being given places in UK universities, the UK government forecasts that over the next 5 years this number will rise by around 15 – 20%.
Even though many first-year students will secure the university-owned residential accommodation, there will be a significant number of year 2, 3 and 4 students who need to look elsewhere resulting in more than 70% of students in university towns and cities renting privately!
Those university students who are looking to rent privately will be searching for accommodation in the most convenient locations, with high-quality furnishings and nearby on-site amenities. Those overseas students and students demanding private purpose-built accommodations will offer investors compelling property investment opportunities for those who are looking to capitalise on this steady growth.
In the year 2017, there were £3.1bn worth of student units sold which is double the numbers traded in the years 2013 and 2014. Of those deals, the top 5 largest deals (which amounted to a total of £1.5bn combined) were sold to investors who are based overseas!
The organiser of the Student Housing 2017 conference, that was held in Covent Garden’s De Vere Grand Connaught Rooms, Andrew Mason stated that student housing is a “truly global asset class”.
Knight Frank also had their say and estimated that the UK purpose-built student accommodation properties market is worth £46bn. Along with this record number, it is also estimated that new developments to be completed this year are likely to total a grand £4.7bn.
Research conducted by Knight Frank also shows that more than a fifth of students are now more likely to be prepared to pay more than £160 a week if the student accommodation facilities impress them. This offers opportunities for a good rental yield especially if you have a good property and a great location.
Increasing Student Numbers Offer Long-Term Returns
Housing Demands – The increasing number of students applying for university in the UK from within the country and overseas each year is making it harder for universities to keep up with the demand for accommodation. In particular, the population of non-EU students is set to climb quickly over the next ten years (as shown from research by JLL Corporate Property Management). Universities simply aren’t able to build accommodation fast enough and many universities stipulate that students are only permitted to stay in halls or purpose-built student housing for the first year. Even with these restrictions, not every first-year student will be able to secure university accommodation and when those that are fortunate enough to be housed by the university approach their second year, they will need to start thinking about whom they want to live with and where they are going to rent a privately-owned property.
Strong Asset Class – Student accommodation investments are considered to be one of the strongest performing asset classes in the UK. Many investors have described student accommodation investments as recession-proof because, despite the rise in tuition fees combined with the negative economic issues experienced in the UK over the last ten years, people are still going to university in increasing numbers. It is therefore predicted that there will be high demand for student accommodation for the foreseeable future. Whilst other asset classes performed badly during the recession, student accommodation remained a strong sector for investment.
As well as having high demand, PBSA also offers a stream of income that is much more predictable than other investments, in large part because of the constant demand. On top of this, student accommodation investments also tend to execute better than HMOs and traditional buy-to-let property investments. HMO landlords will be expecting a minimum annual yield of between 5% and 7% – in some areas it can be more. If you have found a good investment and location then it is possible you can see returns of up to 10% per annum on your student accommodation investment.
Year Long Student Tenancies – If you keep your student tenants happy they can end up staying in your property for years. Depending on the course the student takes, it will take a number of years to complete the course and get the qualification. Most university students will stay on their course for a few years and some students such as medical students will be in further education for about 6 years – they will need somewhere to live throughout that whole period! There is then the potential that they will stay in your property for their entire duration at university, which secures and assures rent for you over a much longer period than would be possible with a regular buy-to-let or HMO.
On the other hand, it is worth noting that students today have much higher expectations and will definitely not want to live in a house ridden with mould, damp and other property problems. If you have a regular buy-to-let or HMO that you rent to students you must stay on top of these issues otherwise you may lose tenants. There are also other responsibilities that need to be taken into consideration such as appropriate fire safety measures, annual gas checks and electrics checks every five years. None of these potential problems are issues with PBSA investments.
Specialist Student Accommodation – There is an increasing desire for specialist student accommodation from both overseas and UK student and the student ‘pods’ that make up the investment must be purpose-built to a high-specification that makes a good use of space, gives each student a ‘home from home’, and has all the ‘mod-cons’ that they enjoy. Broadband, Wi-Fi, communal areas, workspace, bedroom space, bathrooms and kitchens are generally included in one unit – giving tenants the independence that they want after leaving home.
Pension Fund Benefit – student accommodation will be eligible for your pension fund but HMOs, houses and flats won’t. Buying your purpose-built accommodation through your pension scheme will not attract income tax and the property won’t make you liable for capital gains on any profits from a sale. Furthermore, as PBSA are classed as commercial properties there is no Stamp Duty on purchases below £150,000.
Management benefit – Student accommodation will also likely be managed by a property management company. Those who would prefer not to be hands-on will find this a huge benefit as all the repairs, maintenance, tenant disputes, tenant sourcing and rent payments will be taken care of by a property manager. You will not need to deal with the stress and responsibility of managing a property on your own. In terms of cost and time, they offer a lot of advantages, especially to the newer investor as you can focus on the important parts of becoming a successful property investor and not be tied up with admin, etc.
Some extra benefits include:
- Investment properties usually only require around £45 – £80k to be invested
- Sustainable and assured 7 – 9% net yields are the norm
- Recession-resistant – university applications usually go up in times of economic slowdown and the student accommodation sector is not something that is expected to be overly affected by the wider economic conditions.
- A combination of low prices, stable yields and fewer or shorter void periods mean that a student accommodation investment is a very attractive addition to help you build your property portfolio.
How Safe is Student Accommodation Investment?
As with any investment, there are risks, but with good research, professional advice and due diligence it is possible to neutralize the risks. Like any property deal or investment, the key is location, location, location.
Let’s look at some of the possible pitfalls of these investments, starting with the rent assurance.
What If Rent Assurance Is Not Honoured?
When it comes to the rent assurance it can make a lot of investors, especially first-time investors, nervous or uncertain because of the possibility that rent does not come in for the entire period of assurance. This is a common worry that investors will have because not every investor will be experienced or good at sourcing tenants. Finding tenants and managing them to ensure the collection of rent is something that not every investor will want to do as these investments are advertised as ‘hands-free – meaning that once you have paid your money everything is fully-managed and taken care of for you.
The rent assurance, whilst attractive, is something that you should not just take at face value. You need to do your own research to ensure that the developer you are choosing to give your time and money to is experienced and has a track record of successful developments in the sector. It is better to go with a developer that you can trust that also has a track record they can show you for you to see the real results.
A good developer will honour the rent assurance and they will also complete and deliver on time. Once you have found a developer that meets these credentials, the rent assurance will be something you can put your trust in.
Can The Exit Be Difficult After Rent Assurance Expires?
What about the exit strategy for a student accommodation investment? What happens when the rent assurance for your student accommodation investment is over and you are no longer seeing the benefits of keeping a student property in your portfolio? Will selling the property be something that is more difficult due to the nature of the property? Will the investment be worth it overall?
A simple answer would be that it is all about the location. If the setting of your student accommodation asset is in a prime location with good facilities nearby and a high student population then there is always going to be a demand for student accommodation and investors will continue to look for available investments in this field.
Interestingly, despite concerns about selling student property as an exit strategy, we do not see many student properties going up for sale and when they do they tend to be sold very quickly.
This indicates that if the right location is chosen then these investments provide an exceptional yield and are good for the long-term as a residual income generator and can also be easily sold if you need to free up cash quickly.
The fact is that if the yield is good and the demand for your property is high, then you may not even get to the point where you want to sell your property on. Why would you want to sell when your investment is thriving?
As previously discussed, there will always be students as the demand for education only increases over time and students will always need somewhere to live so there appears to be no foreseeable shelf-life for these investments.
Try to look beyond the developer incentives and try not to focus on them too much. If you strip away all the assurances and incentives and look at the location – in terms of both which city the building is in and the exact area in which it is situated – and the investment still stands up then you potentially have a very good long-term investment opportunity.
Along with the known benefits of off-plan buying, there are also a few concerns. In the same way that you need to do your own research for developer rent assurances, you also need to do research for a good deal on an off-plan property.
For every bad developer that has had problems, there are 10 good ones who have delivered good returns for investors.
It cannot be stressed enough how vital it is to do your research on the developer, the management company, the area and the forecast. Every investment will have possible risks and carrying out due diligence and getting good advice minimises the risks.
Don’t feel discouraged over the few unsuccessful student property investment projects because there are plenty of successfully completed student property projects that investors have done very well out of and are receiving regular incomes from.
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