This week, Karen from Sale asked: "why can't I get lending on my purpose-built student accommodation?" In this video, Johnsy explores the reasons behind why there are limited lending options and why cash investments could be better.
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Please see below the full transcript of the video:
Hi and welcome to the latest Ask Johnsy where we’re going to look at whether you can mortgage purpose-built student accommodation. This question is from, again, Karen in Sale who has asked: “why can’t I get lending on my purpose-built student accommodation?”
The answer is very simple, I mean, when a lender looks to lend on a property, they look in case of a default of the payments. They look at how quickly and easily they can sell that asset on. Now, the value of an asset of a purpose-built student accommodation is based on the rent it generates, not on some valuation that a bank does. It has no correlation to the UK residential market, for example, so you can’t compare it to what it would be like to how much it would cost to live in it. So, therefore, lenders don’t like small apartments, they don’t like anything below 30 square meters generally. I know you can get them up to about 28sqm, but certainly not on a 14, 15, 16, 18, 20sqm studio apartment.
The size of these apartments, they’re built without storage. Students don’t need storage space generally-speaking. They do have communal areas, they have bike stores and in certain areas, storage containers as well where things can be put into storage. But, there’s no valuations on purpose-built student accommodation, it is only a cash-only market at the moment. Some lenders have started to show interest in providing leverage to investors, but that’s generally directed at foreign investors where the interest rates in their own countries are so high that actually, it’s more beneficial for them to get lending in the UK as opposed to may re-financing or leverage in another asset.
Generally speaking, the loan to value is very low so you might only be able to lend 40-50% of the value and the interest rates are quite high, you know, 4, 5, 6, 7, 8% interest rates. So, lending should only really be used if you commit to a purchase and you have a change in circumstance, and you need to lend the money in order to progress. So, I don’t really expect a change in this area in terms of lending in the near future, although who knows, there could be leverage options coming to the market in the future, but really whether people take them up will really depend on that loan to value and the interest rates that are offered.
And that’s it. So, in summary, no you can’t finance purpose-built student accommodation but what I would say is that in some cases it’s quite a relief that you can’t. In 2008 when the property market was shot, a lot of people’s portfolios could’ve been saved if they would’ve had cash investments. Without following these so-called ‘internet property gurus’ and mortgaging everything to the hilt and everything to the red line, because a change in interest rates can really kill you if that’s the strategy you’re going to take. I always advise my investors if they’re building a portfolio to yes, look at the buy-to-let mortgage and re-leverage however, always look to stabilise your portfolio with a cash investment with a guarantee backed behind it; that gives you a lot of stability to your portfolio and it’s something that people are really starting to take notice of.
And that’s it from me. Thank you.
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