As a form of property investment, student accommodation investments seem to be becoming ever more popular. That might have something to do with the fact that university student numbers have been rising steadily in recent years.
In August 2018, the Universities and Colleges Admissions Service (UCAS) reported that a record number of UK students had secured a place at university, and noted that large numbers of overseas students had also been accepted to study in the UK. Now, with this year's cohorts busy with their A-levels, university student numbers could be higher still in the 2019-2020 academic year.
What is clear is that with nearly half a million new students likely to be finding undergraduate places in 2019, demand for student accommodation has never looked stronger. Naturally, this continuing trend has attracted considerable investor interest, so we thought that now would be a good time to ask Residential Estates' Jason Guest to talk us through the distinctive characteristics of the market.
Q. So, Jason: what are the main appeals of student property accommodation?
Well, you've already alluded to demand, which is extremely strong in the UK for student accommodation. There are well over two million students currently in higher education, most of whom will be relatively young and will have moved out from the family home for the first time. That puts a lot of pressure on local housing supply. Even if a big proportion of new arrivals go to university-controlled halls of residence in their first year, similar numbers will be moving out of halls in their second and subsequent years. So it's a steady churn that sustains very healthy demand in the private rental sector, and which minimises the risk of void periods.
This 'steadiness' is important. One of the things that most distinguishes the student accommodation market from mainstream residential markets is the fact that demand is so reliable. The academic year runs like clockwork, so landlords can predict, almost to the day, when the next annual surge of demand will come. That makes the investment much easier to plan, and it makes cashflow that much easier to forecast. For investors, that's always good news.
Another important attraction is the rental return. Typically, student properties don't come with hefty price tags attached, and if we're talking about modern and new build units, they are usually quite small. But crucially, the rental return per square metre can be far better than you'd see on, say, a conventional house or flat. A lot depends on the location, of course, but if you find a good property in a town or city with a popular university, returns of 7% and higher are perfectly achievable.
The other big draw is affordability. In the past, the big pension fund managers would often snap up whole floors of new student property, but now the market is open for individuals to buy single units. Investors don't need to pay a fortune to secure a good, marketable property, and the combination of low prices and high returns means that yields can be excellent. Invest in a good student property investment and your money really can be made to work very hard indeed.
Q. That all sounds very positive. I'm assuming there's a "but" coming?
Possibly. While it's true that many student properties don't cost the earth, there's still an affordability issue. That's because of the conditions attached to buy-to-let mortgages.
Lenders don't generally offer buy to let mortgages on student properties. They tend not to want to lend on anything with a value of below £100,000 and, when it comes to size limits, they won't normally extend a mortgage to a property with an area of less than 30 square metres. So if, for example, you're thinking about buying a small student flat within a larger development, you probably won't be able to do it with the help of a mortgage. There are two main consequences of that: firstly, it obviously means you have to find the cash for an outright purchase, and secondly, you're not going to be able to take advantage of any leverage opportunities.
Q. And that's always the case, is it?
The 30 square metre limit is pretty clear-cut, but the rules can start to change if you're looking at other forms of student accommodation, such as converting a house into flats. HMOs have their own specific rules, too. In such cases, it's best not to generalise; just aim to take good advice. Talk it through with a professional adviser and make sure you understand all the details. Check all your assumptions before you commit to anything.
Q. You talked about finding 'a good, marketable property'. In practical terms, what would that look like?
That depends on the location, but there are some pointers that should apply to most student property investments. Proximity to the main university campus is important; students won't want to spend a fortune on travel costs, getting to and from their lectures every day. If they can walk or cycle, or take a short bus journey, they'll save time and money, and that should help to keep the property on their shortlists.
Another good sign is a property set in what is obviously a 'student area.' Universities can create their own fashionable student districts and being part of a thriving 'scene' can be important to many potential tenants. This is true in cities such as Liverpool and Manchester, where there are districts with shops, cafes, bars and nightclubs all catering for their local student clientele.
In some traditional cities, older converted properties have a certain 'poetic' appeal, but in the great majority of British university towns and cities, it's the more modern, well equipped properties that see the most demand. Historic stone muses might seem romantic, but in the 21st century, most students will be looking for security, comfort and excellent WiFi. For these reasons, new-build units and purpose-built student developments often command the best prices for student property investments.
Q. 'The big university cities' are often recommended to investors. What are your views on those?
There's no doubt that cities with large student populations sustain high levels of demand and help to energise the buy-to-let market. That's happened in Liverpool, Manchester, Nottingham, Birmingham and elsewhere. Student populations can be a big contributor to overall market demand, and recent history would suggest that university towns in the Midlands, the North West and Scotland are some of the UK's best areas for yields and capital appreciation.
However, there's a risk to just going with the herd. When it comes to student accommodation, big cities mean lots of choice. In Manchester, for example, more and more purpose-designed student blocks are being built, and alongside those, there are HMOs, countless terraced properties and many live-in landlords who make a bit of extra cash by renting out a single room or floor within their property. What that means in practice is that a property investor entering the market for the first time could face considerable competition at almost every price point in the student accommodation sector. That's not to say that new landlords will necessarily struggle to find tenants - there will always be strong demand for good, well-located accommodation - but basic economic theory tells us that as housing supply increases, so prices tend to contract.
But don't get me wrong; there are still some great opportunities in cities like Liverpool and Manchester. It's just that most other investors know that, too. As a result, prices are creeping steadily upwards, and high yields will become increasingly difficult to achieve. If you can find a good deal, then by all means grab it, but don't overlook opportunities in more up-and-coming locations.
Q. Can you suggest any examples?
There are a number of smaller British cities with disproportionately large student populations. Many of them could offer good opportunities for student property investments Look for places where demand is strong, prices haven't risen too high and there isn't a huge amount of existing competition in terms of attractive, new-build student properties. By those measures, the best target areas might (again) be Scotland, the Midlands and the North West.
Regions that saw prices rise more slowly after the crash of 2008 now tend to offer the best potential for student accommodation investments, because values never overheated and they still have room to grow. Low purchase prices translate into better yields.
Q. Can you give any specific examples?
Stoke on Trent is an excellent example of all that I've been discussing. We're also very excited about Preston. It's a city with a very large university population and it's undergoing a big urban transformation. We talked about it in a previous post. The University of Central Lancashire (UCLan) is in the UK top 20 in terms of student population, and this has a big impact on the private rental market, particularly given that the city itself is only relatively small.
We're working on a student development in Preston city centre, just a few minutes from the main university campus and here, upon completion in 2021, investors can expect to earn guaranteed 9% returns for five years.
But Preston is only an example, of course; we have another student development due for completion next year, and that will deliver guaranteed returns of 10% for three years. In both cases, these rental yields are assured by the developer.
Q. What are the typical costs of these properties?
They vary, but as a rough guide, units are going for around £70,000. Those are 'off plan' prices, of course, so investors make a saving by making an early commitment.
Q. But if you commit now, your money is tied up until the project completes. Aren't investors put off by that?
Ordinarily, they might be, but in these particular cases, the developer has agreed to pay 4% interest on all deposits received between the points of exchange and completion. So in other words, anyone who invests early will get 4% interest on their money. That in itself is a better rate of return than anything they could get from a high street bank or building society account.
Q. So in these examples, how do the payments work?
On the current student developments, the investor would pay £5,000 on exchange. Then, in 30 days, he or she would pay approximately 50% of the purchase price. A further 25% would be payable in 6 months' time and the final 25% would be payable on completion. Any interest earned would be taken off the total balance before the final payment. At that point, the assured rental returns would start and the investor would then be paid quarterly.
Q. Thanks. Any last words of advice?
The most important thing to remember is that every opportunity is different. Location, the market conditions, the size and age of a property, even factors like broadband speeds - these can all sway tenants' decisions. So don't be tempted to assume that a student property is automatically a better or worse investment than any other type of property. As ever, it's all about the detail; it always pays to do your research and take advantage of the best professional property investment advice you can get.
To find out more about student properties and other student investment opportunities, please call our advisory team on 01244 343 355.