We look at the reasons for and against student property investments in the UK.
Student property in the UK has seen significant investment over the last 10 years, with the marketing on these types of properties being incredibly exciting for many investors. With yield returns being promised often exceeding 8% it is no wonder so many of our clients inquire about our view on student accommodation as a viable investment option.
When we are looking at student accommodation it is important to differentiate normal residential property which is aimed at student tenants, and property which has a lease restriction for just students. For the purpose of this article we will be focussing on the latter.
Benefits of student property
When assessing a student property the first thing which clients are drawn to is the purchase price. While a city centre 1 bed may cost in excess of £150,000 a student property could be £70,000 and yet from that investment there can be significant yield returns.
An example of this is two properties being advertised at time of writing. One is a £150,000 1 bedroom in Liverpool, generating 6% gross rental return in year 1. The other is a student room, £69,500 and generating 8% net (according to the marketing material) assured for 3 years.
Logically looking at these two options the traditional 1 bed will generate roughly 5% net, a full 3% below the student property, of which with the same investment we can buy two student units and have some change – plus no stamp duty!
Equally, students need a place to stay. Liverpool university is an incredible university seeing growth, a unique medical unit which focus’s on tropical diseases (the only one in the UK) and an undersupply of quality student accommodation.
It seems odd to suggest that a traditional 1 bed may be a better option for your investment.
Questions you should ask before you invest in student property.
While, as with every investment there are some developers better than others when it comes to student property there is significant complexities when buying in this market.
Its not residential
The first suggestion to clients is to stop looking at student property as a residential investment. It is not, student property is a commercial property and should be dealt with the same caution as you would investing in a shop to rent out, an industrial unit, hotel room or car parking space.
The reasoning behind this is that this is a pure investment and will only ever be sold back to an investor. As the bank does not see student as residential property you wont be able to borrow to pay for it using a mortgage, and getting any lending on the property will be slim to none.
Selling it back to investors
But you have cash to buy it so why worry? Again, we have to look at the exit strategy for your investment. If you do want to sell your student property how will you? You may need to find a route into investors which means unlikely to use an estate agent. You may try and use a company like Baron & Cabot to sell the property, however when selling to investors there will need to be a way for them to make money on the investment to make it worth while.
Capital growth issues
This is where there are more differences to residential property. The capital growth you see in the ‘normal’ residential property market only comes from selling your property at a profit. Part of the important work Baron & Cabot do is planning the ideal exit strategy for a property when the growth in value is at its strongest. Often this will mean selling to someone who is on the property ladder. This type of buyer will pay the open market value (OMV) for a property where as an investor will need a discount to make it worth investing in.
With student property as it cant be bought with a mortgage, and there will never be an owner occupier living in there we can only value it at a multiple of its profit – in the same way you would value a business. Ultimately this will be net rental income at 7% + to entice an investor.
So what is the problem if i’m being offered 8% net now, thats only going to grow in value and mean my asset is worth more? This is the key question in this investment, and why a really good broker will be able to help you with the advice here. While the rental may increase, it is important to understand where the rental income figure comes from and who guarantees the rental income?
The rental ‘guarantee’
For more information about ‘rental guarantees’ see the article on that here. The first question is what can you do if they don’t pay the rental guarantee? While every contract is different and most developers are completely honest there are a few out there who may not, or have a track record of not paying these agreements. And what can you do about this? The wording of that is in the contract and we can only give you answers on ones which have passed through our due diligence.
And how is the rental income calculated? Even if the rent is paid as guaranteed at 8% net for the first 3 years is that what it is worth? Going back to the valuation point above if a property is bought at £70,000 with an 8% net income, but after the guaranteed 3 years the net income drops to 6% the asset could be worth £52,500 or £60,000 (based on a re-sale valuation for 8% or 7% net income – feel free to call us to explain this in more detail).
Do the rental numbers stack up
So knowing what the rental is now is imperative, knowing the rentals of similar in the area will help you understand the true valuation of the property and help you to compare it to that 1 bedroom place. It may be that a developer is charging more for the property to fund the additional rent you will receive in the first 3 years, in essence you are giving a developer more money for a unit so he can give it back to you and give you a sense of safety with the guaranteed rent.
Comparing a student property against a residential is simple when utilising the resources that a company like Baron & Cabot can rely on. In essence though assume little to no capital growth in student accommodation and have it as a pure yield play. Over all this could mean a lower overall income, and a much higher risk investment but this can only be judged on property to property.
Should I avoid student property
Like each student property is different as each investor is. The question whether it is suitable for you or not would be judged on your criteria. Often a student property (so long as it is with a good developer who has passed our due diligence) will work for someone who has large amounts of cash, no need for a mortgage, likely already has a portfolio or wants a pure rental income. It may be that the income is a pension alternative and a high yield is required at the expense of long term profit.
Pick up the phone
There is nothing better than asking people who are dealing in property all day everyday for some suggestions when you are trying to balance the alternatives.
Call Baron & Cabot on 0203 287 8282 to discuss your options with an independent broker.