Please note that despite any preconceptions you may have about investing in student property, this market has changed significantly recently and I would recommend all investors to read this article as this sector has not only become the most popular property investment market in the UK, but also the best performing and, in many ways, and with the right due diligence, the safest.
The Coronavirus Effect
Like all other sectors of the property market, the student housing market was hit hard by this unexpected pandemic, as you would expect, particularly existing owners as many students returned home to their families. Some of our management companies have worked hard to create some income for owners by renting the rooms on a short-term let basis to local hospitals who have staff needing to isolate as well as key workers from other sectors. This has been very successful and has softened the blow somewhat.
On the upside, the current situation and future of PBSA (Purpose Built Student Accommodation) is very strong as the number one preference for students is to have their own space. This pandemic has really highlighted one of the many weaknesses of HMO’s (Houses in Multiple Occupancy). The initial panic caused a ripple effect in HMO’s which had led to their demise in popularity. The new academic year will undoubtedly see a race for places in PBSA, particularly those without shared facilities (kitchens and bathrooms).
Lack of Supply
The last ten years have seen a much-needed increase in the supply of PBSA flats across the country. The supply slowed up slightly, on the lead up to the election last year, and Brexit. We expected a surge in new opportunities during 2020, but with current restrictions and delays on existing development commitments costing developers considerably, the pipeline of new opportunities has dried up, even though the number of full-time students outweighs bed spaces by a ratio of 3:1.
As most privately sold PBSA developments utilise the money from sales in order to fund the construction, the highest risk lies with those developers with an abundance of unsold stock. I predict a much more cautious approach to investing moving forward as buyers will look at opportunities with a shorter build time, maybe forcing developers to focus on converting well-located existing buildings to cut building costs and the time it takes for investors to start receiving rental income. We have certainly seen a focus on developments where existing sales have already secured the funds to complete the build such as The Printworks in Preston and One London Road in Keele.
Unfortunately, a focus on smaller and existing buildings will have an impact on the overall supply. New rooms may hit the market sooner, but due to the restrictions and limitations associated with using existing buildings, prices are likely to increase and incentives for investors will be cut, as developers will have more-upfront costs and will be able to rely less on funding from off-plan sales from private investors
Rental Guarantees / Assurances
PBSA prices are derived from the rent generated. It is easy to get carried away with high returns over a long period, but if the rent used to calculate the guarantee is not indicative of the current market rate, then it acts merely as a sales tool for the agent and, at best, a cash-back which will see your returns drop dramatically when the guarantee expires.
Guarantees are normally given by the SPV (Special Purpose Vehicle – a company set up especially for the development) and not the developer, so if the development is a complete flop, the SPV (which will normally have no assets by this stage) will be forced to fold, leaving you to rent the apartment out through traditional methods. This makes it extremely important to work with developers with a track record of paying their guarantees. If well located and in a high demand area, providing guarantees can be a good income stream for developers but they take all of the risks and we are starting to see very few new opportunities in the pipeline offering such guarantees.
At Residential Estates, looking at new PBSA development that offer a guarantee, we ask the question: “If we were to forecast the returns for our investor, would the forecast be less than or greater than the guarantee?”. We do not agree to sell anything that would be less than the guarantee, this way, we know that the investor will achieve a similar return regardless of the guarantee. This not only requires detailed knowledge of the market but also a close relationship with the university housing departments.
As the PBSA market has matured over the last 10 years, where previously it has been an essential part of the offering, we can see guarantees and assurances being phased out of the market. The PBSA market now has a very successful re-sale market and historical trends are now available to demonstrate high occupancy levels and amazing returns for those who have bought in the right developments. Developers now consider it more important to focus on keeping their prices low and providing more attractive communal facilities, for example, building state-of-the-art gyms big enough to leave a 2-metre gap between equipment to aid social distancing.
The current pandemic has highlighted the importance of outdoor space, particularly well maintained communal gardens. This represents a challenge to PBSA developers now if they are to focus on the conversion of existing buildings. Some of our current student developments such as One London Road in Keele have extensive garden areas spread over a large area, neighbouring acres of park-land, whereas some of the existing developments in the area have no outside space.
Outdoor space is sure to be an important factor over the next few years. Ultimately, it really depends on how deep the scars of the existing pandemic last, and whether this ever happens again, but it will certainly have an impact on the tenants, which in turn will have an impact on demand and pricing, which should lead to developers offering more, well-maintained outdoor space.
What will happen this year?
The structure of the forthcoming academic year is still uncertain as some universities are preparing to operate remotely for the first term, although recent improvements in the situation has seen most universities preparing for “business-as-usual”. The long-term future has never been in doubt as distant learning is simply less effective, and in many cases, impossible.
The worst-case scenario for the PBSA investor is a delay in filling rooms for the academic year, although most well located PBSA developments are already booked up in advance. And while first-year students may still default to on-campus halls of residence as a preference, we are already seeing a fight for places in PBSA developments featuring self-contained studios with private facilities.
Recent investor sales in off-plan PBSA developments
As you would expect, given the findings above, sales in new PBSA developments are at an all-time high. With 60% of private investment coming from overseas investors, the weak pound has further fuelled this buying frenzy. Additionally, savvy investors are looking for more personal revenue streams, so having a high-returning, steady, guaranteed income from a hands-off investment has become more attractive than ever.
Previously, UK investors had been split between investing in HMO’s or PBSA but with recent trends, it is obvious that the PBSA sector will become even more popular with social distancing, better facilities, more advanced technology (such as well-maintained and dedicated fibre-optic internet services) and well maintained outdoor space.
Finally, the days of securing fully self-contained apartments at under £70,000 with guaranteed net returns of up to 10% for 3 to 5 years are numbered and with most existing portfolios being snapped up by large investment funds once they have proved themselves over a short period of time, investors are being handed very lucrative exit options which, in some cases, can see them doubling their money within a few years.
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Written by Michael Johns