Is Student Accommodation a Good Investment in the UK?
Are They Right For You?
Student Accommodation Investment – If you are an experienced property investor or even if you’re just starting out then you most likely would have heard about purpose built student accommodation (PBSA) properties and the investment opportunities they offer. A lot of property investors will have been told about student accommodation property investments and how they assure rental income and have the potential for great returns, making it a safe and fairly simple property investment opportunity with a tried and tested property investment strategy that is virtually fool-proof.
In this article, we review student property investments and look at both the good, the bad and how to mitigate against the downsides to help you decide whether a student accommodation property is the right investment for you to take your portfolio to the next level.
Student Property Investments and Regular Buy-to-Lets
An investment in student accommodation properties requires a strategy that has the same fundamentals as the regular residential property investments so if you are not an expert in dealing with a student accommodation investment then the process of having your own student accommodation investment shouldn’t be any more daunting in terms of strategy.
However, there are other considerations that you need to make with this specific investment that you may not have to consider with regular buy-to-let property investments.
Student property investments are obviously very different in nature to residential property investments such as a buy-to-lets because they are purpose-built for student living. This means that your investment is in a single unit which is a lot cheaper than buying a four-bed property.
In addition as a new purpose-built dwelling, the developers will manage a lot of the tenanting process for you.
This means that for a comparatively modest cash price you can get a stake in the property market in a top university location as well as a regular income without the stressful hassle of needing to manage a buy-to-let property.
The standard of student accommodation has changed so much over the last few years. If you compare it to 20 years ago the concept of student accommodation was recognised as substandard, whereas nowadays the standard for student accommodation has risen dramatically as students demand a higher standard of living.
Today, developers are offering property investors studios or ‘pods’ that can provide the student attractive living space in a luxurious city-centre building, including gym and cafe facilities.
For as little as £60,000 property investors are being offered these dwellings and a rental assurance for a set number of years as well as the management of the property and the sourcing of the tenants taken care of.
But is this something that anyone can assure? Are there risks involved that developers aren’t telling you about?
In reality, the sales pitch of a student accommodation investment looks good, but are the returns really what are being claimed?
Is Student Accommodation a Good Investment?
Student accommodation property investment has been a fast-growing property investment strategy that a lot of new and experienced investors have had success with. In the UK specifically, it is a property investment strategy that has increased in popularity due to it being the strongest performing asset class over all other forms of investment in the commercial sector for the past 3 years – and all indications are that it will continue to boom.
There is always going to be a demand for student accommodation, despite the rising university tuition fees, because higher education is important to many people. The ever-present issue with space and lack of housing in the UK is going to remain an issue; therefore student accommodation is an asset that can be very valuable and useful for both the student tenant and the investor.
An important note to make is that the UK is a popular location for overseas students and it is increasing in popularity. This factor in combination with the deficiency in purpose-built accommodation to meet the rising demand has made student accommodation property investment a very worthwhile and profitable investment for any property investor.
As well as the UK’s popularity with overseas students, it is becoming increasingly popular with overseas property investors. London has always been popular with foreign investors, the difference with student accommodation is that the most attractive returns are available outside of London in traditional university cities like Manchester, Sheffield, Huddersfield and Liverpool.
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.
Profits for student property investors have also increased because providers are raising rents in order to offer their student tenants with a more hotel-style of living. There are more facilities available to student tenants in certain properties which include gyms, pools, private cinemas and concierge services.
This just goes to show that student accommodation investments don’t always have to mean smaller, less valuable properties with uncertain rental income. There are better quality purpose-built student properties that can provide your student tenants with more value, encouraging them to spend more money on rent which will add to your profits as the investor.
On top of this, in new student property developments, shared bathrooms are becoming a thing of the past as many have the option of studio bedrooms with a bed, desk, kitchenette, living space and a bathroom. The key to attracting the most highest-paying students according to designers and developers is to provide them with a high standard and a wide range of communal spaces with ample facilities as well as considering providing them with more luxurious rooms for a good balance.
Investors are being promised 5 years of assured returns of about 7 – 9%. This can be achieved from an investment starting as low as £60,000. Behind the marketing, there are always going to be details that may appear hidden. For example, mortgage lenders are not exactly keen on advancing money against this type of investment, therefore cash will almost certainly be required to invest in a student pod. This is just one of the things you need to consider before deciding that investing in a student accommodation property is right for you.
There are many reasons for property investors to consider purpose-built student accommodation as a viable investment. Below are some of the main advantages and benefits of student accommodation investments.
The Main Advantages of Student Property Investment
The benefits briefly mentioned above are what you need to look at when it comes to weighing up the options of choosing the best place to invest in student accommodation. Also, you should be able to recognise and evaluate the risks to see if a student accommodation investment is something you will benefit from to reach your financial goals.
Student Numbers and Demand for Accommodation
In the UK the past 20 years have seen a huge increase in the number of students going to a higher education establishment. Higher education in the UK is now seen as commonplace whereas rewinding back to the ’90s going to university was seen as a privilege that could only be obtained by the elite few.
In 2016 there were more than 450,000 new full-time students attending a higher education establishment in the UK. This figure is even more surprising considering the recent increases in annual student tuition fees, but it certainly shows the resilience of the sector and that higher education is valued highly.
On top of these figures, there has also been a prevalent and consistent annual growth in the number of students from overseas studying in the UK. Studies estimated that from 2011 to 2012 the overseas students studying in the UK paid just under £4bn in tuition fees to higher education establishments and a further £6.3bn roughly in living expenses.
At the same time as the competition is growing in other markets, universities in the UK are highly regarded throughout the world, so the demand for a place in the university from overseas students is consistently high. At the moment, it has been estimated that the number of overseas students studying in the UK will increase by about 15-20% in the next 5 years.
Overseas students are more likely to be attracted to the newly developed private halls because of their city centre locations and high specification finishing. In a way, overseas students can be seen as the kick-starter for the high demand in higher quality student accommodations in the UK.
The new style of private halls of residence is now far removed from the traditional HMO (House in Multiple Occupation) model which reflects the growing buying power of the modern student.
Importantly, rent for the new privately managed halls is up to 75% higher than traditional HMO’s in some of the more popular student destinations. Even in the less popular destinations, student rents are likely to be about 20% higher in private halls than traditional HMO’s.
Can almost be considered recession-proof. This is obvious from the figures as people are not going to stop going to university during a recession. In fact, the opposite is perhaps true because if there are fewer jobs available and therefore more competition, school-leavers are more likely to go down the path of considering a course of study.
The fact is that as the UK population increases more children are born and therefore there will be an increasing number of students as the population continues to rise.
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.
Off-plan Student Property Investments
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.
At the point of completion, you can either sell the property on to another investor for a quick profit or you can keep the property to get benefits from the ongoing rental income.
Having said that, we have noticed that most investors are more inclined to invest in student accommodation as a long-term investment that pays out residual income with good yields, rather than as an investment that will make significant profits from capital appreciation.
There are other financial benefits to purchasing an off-plan development property that combined with the benefits of a student accommodation investment, can give you the financial benefits and return the profits you need.
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:
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.
Purpose-Built Student Properties
You can provide your tenants with all the benefits of living in halls of residence with purpose-built student accommodation. Examples of the benefits of purpose-built student accommodation are common rooms, study areas and Wi-Fi within a few minutes away from the university. In addition to shops, work opportunities and a local nightlife close by.
Many of the disadvantages of the traditional HMO and BTL (Buy-to-let) property investments can be avoided whilst still seeing the benefits of higher yields and shorter void periods where you don’t have a tenant by investing in a purpose-built student accommodation property.
Net Yields Are Higher and Rent is Assured
Net yields for student accommodation investments are more than many gross yields for regular buy-to-let property investments. Student accommodation can have higher yields primarily because, as discussed, students are prepared to pay higher rents to live in a modern building with lots of facilities in a great location.
These types of buildings will also reduce the cost of management and utilities to run and operate the property. As a result of this, you are more likely to receive a net yield that is as high as (or even higher) than a regular and traditional buy-to-let.
In addition to the higher net yield student accommodation property investments often give rent assurances.
Developers can do this because of the high demand for student accommodation and the shorter periods of void – finding student tenants and getting rent is not a major hurdle to overcome in many cities due to the ratio of students to available properties. Along with this, student tenants are frequently considered to be good payers despite the horror stories of students being difficult tenants and bad at paying rent on time. If there ever is a problem when it comes to rent, usually the parent guarantor can be called to pay the overdue rent for their son or daughter.
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.
There is a large and growing student population that universities can’t keep up with in terms of housing, making the demand for student accommodation higher and ongoing.
The forecast is that student accommodation properties will remain more lucrative investments that have a long-term future as the number of students studying in the UK increases.
Student accommodation does have a higher return on yield than many other property investment strategies due to the greater chance of rental incomes due to fewer void periods as a result of demand.
However, you need to take extra care when considering who to go to for a good student accommodation deal. Whilst many salespeople will promise that rental income is assured, you must be clear that it takes a great location, a good deal and the right execution to get the best possible outcome from a student accommodation investment.
The risks and benefits can be assessed by a property developer or portfolio manager. It is important that you consult a professional regarding a student property investment to ensure that you are on the right track.
Want more details on whether student accommodation is the right investment for you?
At Sterling Woodrow, we pride ourselves on helping new property investors get a solid start in the market and are happy to speak to you about your long-term goals and ambitions in property investment.
We also work with experienced investors to help them increase the value and profitability of their portfolios.
Get in touch today for your complimentary student property investment consultation with one of our senior property investment managers. We cannot wait to help you with your property investment journey.