Purpose built student accommodation (PBSA) has fast become one of the most lucrative investment types in the UK and it is easy to see why. The UK is home to some of the finest Universities in the world. Last year alone there were 2.38 million students studying at UK higher education institutions and 439,955 staff; all contributing towards the £38.2 billion income the sector generated, a large amount of which went into accommodation. Student rents have grown pretty much year on year for the last two decades. Last year alone, saw a rise of 2.36% with the average weekly rent of a studio apartment outside of London up to £175 per week. With that in mind, you would imagine investing in any PBSA would generate landlords a large income? This is true to some extent however, like anything, there are some areas better than others and I want to highlight why that is and offer some insight into where to look for the best yields.
Generating a good rental yield typically involves two things: high rent and low purchase cost. The uniqueness of student property is that, outside of London, rents are reasonably similar throughout. Unlike residential property where you could pick up a 1 bed for example for £400 a month and then 100 miles away find one at £1,000 a month. The gap in student property is much smaller. Student loans play a huge factor in this; the vast majority of student rents are paid for using these loans, thus meaning landlords don’t have to set their rents based on the local economy. Again, relating this back to residential property, rents in that sector are predominantly based on what people earn and more importantly what they can afford. Therefore the first part of generating a good yield (high rent) can be pretty much assured throughout the UK. It’s the second part (low purchase cost) that will predominantly determine you a good yield. For the vast majority, secondary locations outside of the major cities provide this. A common misconception by some investors is to mix buying student property with the major cities that are seen to be doing well. As mentioned, rents will be similar but purchase prices and ultimately yields, will be different. To give an example on this: a student studio apartment in Manchester will typically cost in the region of £90,000 with an average weekly rent of £145. Whereas a similar apartment in Sunderland would typically cost in the region of £55,000 with an average weekly rent of £120. The first of the two options above would produce a gross yield of 8% whereas the second will generate 11%. In fairness to developers here, land cost is much higher in the major cities so they have to inflate prices in order to make the development financially viable. Another misconception here is that many investors believe because their PBSA is in a major city, they will see much higher growth than that of one in a secondary city. This is not the case, growth in student property is very low wherever you buy. The purpose of buying a PBSA should always be around generating a high income as appose to a quick uplift as the latter rarely exists in this sector.
Clearly there are numerous secondary locations in the UK that offer PBSA at a low purchase cost. So with that filter in place, you can then focus back on which of those places will produce you the highest rent. Granted the difference may not be that large but it is a good way of dissecting the market further and helping you towards finding the best PBSA yield possible. Demand is a major factor in determining the weekly rent of a PBSA in one location to another. The less options available to students gives landlords the ability to increase rents. To go one step further on this, some locations have very little University owned accommodation giving landlords much more power than that of those in areas where the students are spoiled for choice by the University. Again, to give an example here, Keele University has just over 15,000 students but the campus itself has in the region of just 2,500 bed spaces. Similarly in Lancaster, there are just over 15,000 students but in this case the University has over 7,000 bed spaces. There is no doubt that the first apartments to be filled each year are that owned by the Universities as they are much easily marketed to students given the close relationship the University has with them. The other factor which contributes to demand and ultimately rental rates are the amount of houses of multiple occupation (HMO’s) or standard residential apartments in one particular area that may attract certain students. Even though PBSA is generally much more favorable to the majority of students, given the quality and communal facilities, having a wider choice of accommodation can make it a little harder for landlords to put prices too high.
PBSA is and will continue to be a very lucrative investment type for property investors. The UK prides itself on the education it offers its students and this will not change regardless of which political party is in power. Using the above filters should help determine which investment options are better than others in this sector and ultimately help find the best PBSA yield.
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