In recent years student property has risen from a niche asset class to global powerhouse, backed by a fast and steady rise in the numbers of students worldwide. In the UK, a loosening of restrictions on the number of places that universities can hold, coupled with a growing demand from overseas students has seen university populations grow.
With high yields on offer and high demand for housing, student accommodation seems like the golden ticket. However, it is not without its pitfalls. A number of high-profile cases have featured investors let down by the promise of guaranteed rents with fixed returns. And, if you’re looking to take a more hands-on approach by circumventing the management companies, there are a number of factors that make student-appropriate accommodation a trickier prospect than your average buy-to-let.
The key to making a good investment is understanding what you’re signing up to. One of the key factors you will need to get right is the property type. In this article we cover three popular categories of student accommodation, taking you through the advantages and drawbacks you should consider when deciding if student accommodation is the investment for you.
Sometimes referred to as student accommodation, student pods are single rooms with a student block, that have shared facilities including a kitchen. The majority of these investments are sold off-plan and come fully managed.
- Low cost of entry: With investments possible in a single room, the cost of entry compared to other types of student accommodation is significantly lower.
- Hands-off investment: As this form of investment predominantly comes fully managed, student pods offer a hands-off way to earn from rental income.
- Guaranteed rents at high returns: Many management companies offer guaranteed rents over a fixed term, ensuring that you receive a fixed return at pre-determined rate. However, it’s important to note that these guarantees are only as good as the firms that stand behind them.
- Resale potential: Unlike other categories of student accommodation, student pods can only be resold to investors. That makes your potential pool of buyers significantly smaller than properties that appeal to the whole of market.
- Tenancy potential: As well as a smaller market for resale, the potential for tenancy is also significantly reduced by being restricted to the student market.
- Finding a mortgage: Due to the resale and tenancy concerns, you may find it difficult to find a mortgage. For this reason, investors in Student Pods tend to be cash buyers
- Development risk: Buying off-plan carries some additional risk. One of these is the potential that a developer does not complete the development. Ensure you do your research on the developer, checking that they are reputable and have the correct insurance in place.
- Management risk: A second risk associated with buying off-plan lies with the management company that runs the building after the development is complete. If the management company is not competent, your returns may suffer.
There is a complex legal definition as to what exactly constitutes a House in Multiple Occupation (HMO). However, it can be loosely defined as a building where more than one household lives and shares facilities. A household, in this case, is where members of a family live together, including unmarried couples.
- Higher yields: Dividing a large property into multiple occupancies will usually bring in a higher yield than if the property was let as a single home.
- Cashflow: Higher rental yields obviously mean higher cash-flow. But, it’s worth noting that the overheads of running a HMO are significantly higher than with a single occupancy. If cash flow is a high priority, rather than having profits wrapped-up in capital gains, converting to a HMO is a good option.
- Resale: Unlike student pods, HMOs can be re-sold to the whole of market, meaning more potential buyers.
- Management time: Owing to the multiple households living under one roof, HMOs take significantly more management time than single occupancy properties. As well as managing multiple tenants, there are a number of stricter requirements that the landlord must meet.
- Hiring a property management company: If you’re planning on contracting the management of the property out, be aware that many property management companies do not take on HMOs. When you find one that does, ensure that they’re up to the job, as the success or failure of the investment will rest heavily on their shoulders.
- Increased overheads: Council tax and insurance will cost you more for a HMO. Additionally, you will need to factor in the cost of converting the property into a HMO and the cost of obtaining a license.
- HMO licensing: Larger HMOs will require a specific licence. Your requirement to hold a licence will depend on the nature and location of your property. The cost of a licence will also fluctuate depending on nature of the property and the issuing authority.
- Resale: In order to achieve full sale potential, HMOs will often need to be converted back into a family home.
Self-Contained Student Apartments
Self-contained apartments offer students bedroom, living room, small kitchen and en-suite within a single unit. Often coming in blocks, they may also feature certain shared facilities, such as gym and laundry services. Like student pods, the majority of these investments are sold off plan and come fully managed.
- Hands-off investment: As this form of investment often comes fully managed, they allow investors to earn from rental income with no direct involvement.
- Resale: As with HMOs, self-contained apartments can be re-sold to the whole of market, giving them a wider pool of potential buyers than student pods.
- Appeal to overseas market: The self-contained apartment model appeals the preferences of international students. With the number of overseas students rising steadily in the UK, the demand for these properties will continue to grow.
- Evolving student expectations: With tuition fees at record levels, university students are now more inclined to prioritise gaining a good degree over having a good time. This trend has lead to an increasing importance being placed on the quality of student accommodation. With more space and a higher spec finish, self-contained student apartments support this demand.
- Development risk: Buying off-plan carries some additional risk. As with student pods, investors take the risk that a developer will go bust and fail to complete the development.
- Management risk: A second risk associated with buying off-plan lies with the management company that runs the building after the development is complete. If the management company is not competent your returns may take a hit.
Making your decision
Ultimately your choice of property will depend on what type of investor you are. At the hands-off end of the scale, off-plan schemes may seem like the easiest way to invest in student property. But, beware. Although many schemes will deliver on expectations, not all will live up to the promises they make. On the other hand managing your own portfolio is a full-time job, which may not be suitable for investors looking to property as a side-gig.
Wherever you fall on the spectrum, there are some fundamental rules that you should stick to when making your investment decision.
- Do your research. Thoroughly.
- Always invest with a margin of safety.
- Know what type of investor you are.