- Wednesday, April 24, 2024
By: Radhakrishna N S
By Howard Robin
BRITAIN’s university population has risen dramatically in recent years and, with it, the level of interest shown by investors in the student accommodation sector.
Many are attracted by promises of high yields and assured returns. However, the reality behind putting hard-earned cash into this sector is no different to any other. First, there is no such thing as a foolproof investment. Second, there are pluses and minuses to be weighed up and meticulous homework to be done before anyone starts snapping up student flats, houses or one of the thousands of new-build, purpose-built pod units being offered to investors.
With millions of undergraduates gearing up for the new academic year, investing in this sector may seem especially tempting. But before rushing in, it is wise to carefully consider the pros and cons in order to reach an informed decision.
The advantages
The first thing people mention when the subject of investing in student accommodation comes up is the high level of demand. Many UK towns and cities have thriving student populations, and, apart from the relatively small number who are able to live at home, they all need somewhere to rent.
Higher education in the UK has expanded over the past 20-30 years. As recently as the early 1990s, a degree education was considered something for the select few, whereas now it is commonplace for parents to encourage their children to stay on in the sixth form and then go to a college or university.
In 2017–18, there were 2.34 million students at UK higher education institutions. This year, record numbers of 18-year-olds in England have applied for places, latest figures from Ucas (Universities and Colleges Admissions Service) reveal. Though numbers in Scotland, Wales and Northern Ireland have stayed fairly flat, 275,520 young people across the UK as a whole applied to universities in 2019, up from 272,910 at the same point in 2018.
The resilience of the sector has been underlined by the fact that its expansion has defied hefty tuition fee rises. Moreover, if a recent government review recommendation goes ahead to cut fees in England from £9,250 to £7,500, it is likely to further boost demand for places.
The number of overseas students has also increased consistently over recent years, due in part to the UK’s reputation for academic excellence and the ongoing popularity of English as a global language.
It has been estimated that the number of overseas students studying in the UK will increase by about 15-20 per cent in the next five years. Despite uncertainty over Brexit, the number of applicants from the European Union has slightly risen this year. The Ucas figures also show a record number of 81,340 applicants from outside the EU applying to UK universities this year, an increase of eight per cent.
High yield
A fundamental reason the student accommodation sector has been attractive to investors is its provision of comparatively higher rates of return compared to some other commercial property sectors. This is partly because students tend to expect less space to live in than other tenants and are willing to share with multiple people, maximising income for landlords even in smaller units. Those with good properties in good locations, therefore, have the opportunity for excellent rental yields. According to the research conducted by Knight Frank, more than a fifth of students are prepared to pay more than £160 a week for the right kind of accommodation.
Another advantage of renting to students is that they tend to be fairly prompt payers. This may seem counter-intuitive as young people do not always behave as responsibly as their elders. However, in many cases, it is their parents who will be paying the rent, which means the landlord can expect to receive the money on time, while in other cases, the student will have recourse to the cash asset of a student loan to enable them to meet their outgoings.
Another advantage of renting to students is that they tend to be more easygoing than older tenants around maintenance issues.
All good landlords will try and respond as quickly as possible when problems occur, but sometimes things need to be prioritised and younger people tend to be more accepting of this than older tenants who can be very demanding of their ‘rights’.
The disadvantages
A common issue mentioned by landlords who rent to students is the short-term nature of their accommodation needs. As they form new relationships in college, many students will seek to change their living arrangements, often without giving the requisite notice to the landlord. Others may drop out of courses altogether.
There is also the issue of properties being vacated during the long summer holidays and over the Christmas break. This can leave a property exposed to security issues such as vandalism and break-ins, not to mention the interruption to a revenue stream.
Although they tend to complain less about maintenance issues, students are actually more likely to cause them in the first place. Young people can be careless in the way they treat a property, paying less attention to cleanliness and overlooking issues that should be brought to the attention of a landlord. They may also throw parties that can cause wear and tear and leave landlords with increased costs of redecoration and repair. Students are also known to like to play their music loud, leading to complaints from neighbours and more headaches for the landlord.
Location, location, location
It goes without saying that the closer a property is to a university or college, the easier it is to rent out to students as they appreciate being able to get to lectures easily as well as having lower travel costs. However, being close to their place of learning isn’t the only thing student tenants are looking for. For most undergraduates, the social side of university is as important as the academic. So if you are thinking of investing in a student property, it makes sense to find one that is not only handy for getting to and from college but also close to the local student bars and clubs and near enough to the local night-life to avoid the need for expensive cabs.
It should be born in mind that most students do not own cars and many will want to go home to see their families a few times a term and during vacations. So it is advisable to look for a property that is near to good transport links such as a coach or train station. For the same reason, proximity to shops and takeaways is also advisable.
While on the subject of location, it is also worth pointing out that many towns in the UK have specific areas that are popular with students, and investors are advised to bear this in mind as these are the areas where students tend to want to live to be close to the ‘action’.
House of multiple occupation
There are various kinds of properties for investors to consider renting out to students. The traditional choice for many landlords is the shared house or house of multiple occupation (HMO). Because these units tend to be large, they can be converted to accommodate a large number of small bedrooms and rented out on a shared basis to multiple occupants. Students generally don’t expect a great deal of individual space, though there needs to be a communal living room and shared kitchen.
The bonus for the landlord is that such arrangements enable them to maximise the return, spread the risk and have convenient access for maintenance as all the tenants are in one household.
Flats and apartments
The advantage of renting out a flat to students rather than a whole house is that apartments are generally far easier to maintain and manage, and don’t have the hassle of gardens and large external areas. On the downside, they don’t offer the same economies of scale as HMOs. That said, many landlords make excellent returns on flats and apartments that are close to colleges and student areas because they are popular and therefore extremely easy to let.
Purpose-built student accommodation
Few people can have failed to notice the plethora of custom-built student apartment blocks that have been springing up in university areas across the UK. Many of these blocks are of a very high standard, providing students with small but attractive living spaces in a luxurious city-centre building, including gym and cafe facilities.
What the casual observer doesn’t always realise is that as well as housing students, these blocks offer the small investor a completely hands-off way to profit from the student accommodation market.
For an outlay of less than £70,000, investors can own their own pod or studio in one of these blocks. Some developers even guarantee investors an assured rental income for the first five years as well as providing full management of the property and finding the tenants.
In other words, all the investor need do is come up with a relatively modest amount of money and they have a stake in the student property market without the stressful hassle of needing to manage a buy-to-let.
In tandem with its popularity with foreign students, the UK has also become increasingly popular with overseas property investors. One of the reasons that foreign investors have been increasingly drawn to the student accommodation market is that the most attractive returns are not just available in London – the traditional focus of most UK foreign investment – but also outside of the capital in traditional university towns such as Manchester, Sheffield, Liverpool, Bristol and Birmingham.
Between 2013 and 2017, the value of student units traded doubled to £33.1 billion, of which more than third involved foreign investors.
According to Andrew Mason, an organiser for the Student Housing Conference, student housing in the UK has become a “truly global asset class”.
Research from Knight Frank shows that profits for investors in purpose-built student properties have increased through premiumisation of the offering by developers. Added-value features of purpose-built student accommodation now include things like hotel-style living, a wider range of facilities such as gyms, pools, private cinemas and concierge services and individual rather than communal bathrooms.
Sterling Woodrow Property Investments says the key to attracting the highest-paying students is to provide them with a high standard and a wide range of communal spaces with ample facilities as well as considering offering more luxurious rooms for a good balance.
A spokesman said: “Investors are being promised five years of assured returns of about seven-nine per cent. 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.”
Warnings
According to a recent article in the financial magazine MoneyWeek, investing in student property can be risky and doesn’t always “live up to the hype”.
Emma Lunn said: “Assuming you can muster the cash to buy a student property outright, the rental guarantees offered by developers might sound reassuring and lucrative (up to 10 per cent fixed for up to five years). But if these yields sound too good to be true, it’s because they often are. Once the guaranteed period has expired, investors often find the real market rate for rents is much lower than they were initially told. In other cases, the guaranteed rents and returns fail to materialise or last as long as they should.”
Robert Bence of the Property Hub website said: “Many pods are advertised at a rent much higher than what the market dictates and that’s because the guaranteed rent is baked into the price you pay. Management charges are another factor to take into account.”
