An area well worth considering for investment is student housing.
There are always plenty of tenants looking for accommodation, and demand is showing no sign of slowing down too much in the future. In the school year of 2014/2015, the number of students in Higher Education in the UK reached 2,266,075.
Why invest in student accommodation?
Parents could save money by investing in a property for their children, rather than renting accommodation for 3-4 years (or more, depending on how far the studying goes) while they study. In a similar way, buying a house to accommodate a group of students could mean earning a decent rental income.
Investing in student houses or purpose built student accommodation (PBSA) for those without student children, is also a good idea. Developers of PBSA are often keen to attract landlords by guaranteeing rental yields for an initial set period, as well as day-to-day help from a management team. This makes it a very tempting proposition if you’re looking to invest in property, and haven’t yet made up your mind what type of investment to make.
Investing in student houses
If you’re buying a house for your own child, then they can take control of property management. If you’re investing in a house for strangers to live in, then you might feel worried about renting to a group of teenagers who may have no experience of living away from home. However, there are systems in place to make sure rent is collected, and you can insist on guarantors for each student. This is usually the parent, and can take away some of the risk. If you can afford to pay a deposit in cash up front, then that’s a good way to start. However, if you’d rather not pay the deposit yourself, then you can be a gateway for your children to get a mortgage.
Mortgages with a guarantor
This is where a parent, or another family member, formally guarantees to pay the debt if their child doesn’t make the payments on the loan. They will use their own home as collateral for this. Many lenders will expect the student to also earn an income. An example of this kind of mortgage is one that would be in the student’s name only, with the parents acting as guarantors. The amount the student will be able to borrow will usually be dependent on how many rooms will be let out.
A different way to invest in their child’s accommodation would be for parents taking out a joint mortgage. Since the instigation of the extra 3% stamp duty on second homes in April 2016, this has become less popular. Because of these tax complications, it could be better for the child to take out the mortgage with parents acting as guarantors.
The property would then be in the child’s name and would be able to rent out rooms using the rent a room tax break. From 6 April 2016, this was £7,500. The income would then be tax free, however, this takes a lot of planning to achieve.
Joint ownership arrangements should always be put in writing and the best way would be for parents and children who buy a property together to own as tenants in common. This would mean that each own a share of the property and they can decide what to do with it in their will.
This would allow them to clearly show who owns the majority share, which needs to be considered when it comes to tax.
Five things to consider when buying a student house
• Location is extremely important. It needs to have good connections with the nearest town and amenities, as well as to the university. Agents will be able to advise which areas are the most popular and where houses go fastest.
• Remember that student accommodation is one of the only property types that doesn’t have to be in the best area. It’s much more important that the students can reach where the need to go. So, it can be on a busy road, or have less than stellar views, as long as the university is near and the rent is reasonable.
• The kind of student accommodation that rents out the fastest is usually three or four bedroom houses. One bathroom would do, but two would be better. If possible a separate toilet would go a long way. Outside space is nice, but don’t worry about a garden or anything that needs too much maintenance.
• Newer property that is well equipped and modernised is always going to be easier to maintain. It’s best to avoid period property that will need constant attention, as this will just use up your yield and make it difficult to avoid periods where you must cover the mortgage yourself.
• Bathrooms and kitchens should be basic and functional. Robust equipment that will last is more important than fancy gadgets. Flooring needs to be hard wearing and paintwork should be plain.
Purpose Built Student Accommodation (PBSA)
This sector is proving strong. In 2015, 74,500 beds were traded at a cost of £5.6 billion. This data comes from Savills’ UK Student Housing research in May 2016. This sector offers good rental yields and can be a great investment.
However, if you want capital income at the end of your stint of ownership, it’s a risky investment. PBSA has limited interested buyers if you decide to sell.
It’s also not possible to take out a buy-tolet mortgage for PBSA. Instead you’d have to take out a commercial mortgage or pay with cash. PBSA won’t increase in value at the same rate as other residential property and can be difficult to finance, so they’re not for everyone.
If you’re not investing because of your own child, then it’s wise to do plenty of research to find out where the best investment would be. Industry insiders such as the Higher Education Statistics Agency have a lot of information regarding the income of universities. Similarly, the Times HE publishes a financial health check on universities every year.
A key factor to consider is how strong the university is. Cities such as Brighton, London, Manchester and Oxford are generally safe bets, but lesser known universities can also offer a good investment with a strong possibility of high rental yields.
Rental yields in London
Many property developers concentrating on student accommodation have been priced out of the centre of the city. Developers are concentrating on the outer areas of London, including the outer Tube zones and areas such as Wembley and Stratford.
It’s also important to understand that rental yields in London will be lower than they are in other areas, and in other lesser known universities. Rough figures show that central London will command rental yields of 4.5%. Other major university cities will be around 5.5%, and if you concentrate on second tier universities in places like Norwich and Canterbury you could be hitting rental yields of 6.5%.
Student property fund investment
If you don’t want to invest directly into the house yourself, it’s worth looking at investment funds that are specific to the PBSA market.
There are companies in this sector that concentrate on student property, with the option for private investors to buy shares.
Some student property investment funds will concentrate mainly on marketing to overseas students to take up the units. This is because they are more likely to have the financial means to pay for high quality accommodation, plus the fact that they generally pay the rent up front for the entire academic year, making it a safe investment.
The opportunity to invest in a sector that gives high financial yields is attractive for many. It’s a steady rental yield and the weakened sterling means that the UK could become even more attractive for overseas students.
But, student accommodation investment funds are generally considered high risk. They are unregulated and generally have high charges. In addition, they can suffer from poor liquidity, which means it could be difficult to get your money back when you want it.
The best cities to invest in PBSA
We know that this market is very resilient. Since 2015, for example, foreign investors have pretty much doubled their share of the market. It’s certainly one of the safest investment areas we can recommend, but where’s best outside of London?
We’ve had a look at the cities and towns around the country with the best investment opportunities for PBSA. These are our top five:
• PLYMOUTH – this city is located on the coast in the south west of the country. Several well regarded and successful Higher Education (HE) institutions are found there, including the University of Plymouth itself. This is ranked in the top 2% of universities worldwide, and has a student population of about 23,150 (figures for academic year 2016/2017).
The University of Plymouth can only house about 12% of its student population, and has a chronic shortage of housing. While there’s more than 23,000 students, there’s only about 2,800 rooms available within the university itself.
This is where brand new PBSA developments have come in. The lack of housing available is great news for potential property investors, as there is always going to be demand. You can expect potential yields of 8% per annum if you invest in PBSA in Plymouth.
• HUDDERSFIELD – there is a lot of investment going on in this Yorkshire county town right now, including the £74 million redevelopment of the Waterfront Campus belonging to Kirklees College.
Kirklees is one of four highly regarded HE institutions in the town, which includes 2013’s University of the Year, the University of Huddersfield. There’s currently a student population of around 40,000 in the town but a definite lack of suitable housing. Many students find themselves having to travel at least four miles onto campus.
All of which is why new PBSA developments are proving extremely popular in the town – with students and investors alike. The latter can expect rental yields of around 9% per annum.
• BRISTOL – a thriving city in many ways, Bristol is popular with young people. This is partly due to the two universities based in the city. The University of Bristol is often ranked in the top 10 institutions in the UK, while the larger University of West England posts excellent student results post-graduation.
Between them, these two institutions mean there are at least 50,000 students in the city needing homes. Along with the fact that Bristol is becoming very popular as a property hotspot (it was named the best place to live in the UK by a Sunday Times poll this year), means the city is a great place to consider if you want to invest in PBSA developments.
• LIVERPOOL – a huge amount of regeneration has boosted Liverpool’s credentials as a popular place to live, work and study. The city is home to around 67,000 students attending various HE institutions, including the University of Liverpool, Liverpool John Moores, Liverpool Hope and the Liverpool Institute for Performing Arts.
Over recent years, it seems that students are willing to pay for more upscale options when it comes to their housing. This is particularly true for overseas students, and developers have been answering this demand with lovely PBSA developments designed to cater for investors and students.
• LEEDS – this northern powerhouse is a very popular student city, with HE institutions such as the University of Leeds, Leeds Trinity University, Leeds College of Art and Leeds College of Music proving popular.
There’s around 70,000 students in the city, which has led to Leeds being a popular choice for PBSA investment. It’s very much worth looking into the new developments that are coming up, and understanding the benefits they could offer. Demand from tenants and investors remains high, and it’s not going to drop any time soon.
These areas all offer some of the most attractive returns for investors, with all producing rough rental yields of around 7-8% annually. The fact that these cities are chronically under-supplied for student accommodation means that there are many years of developments ahead. Your investment could be in demand for many years to come if you invest at the right time.