Why invest in student accommodation?

Buying property for student accommodation as a buy-to-let investment has long been considered a profitable venture. Despite horror stories in the news about tuition fees, rates of enrolment have never been so high. In the decade between 1999 and 2009 UCAS figures for students accepting university or college places rose from 334,594 to 481,854, a rise of 44%, and that trend seems set to continue. The latest figures available, for 2010, showed 570,556 applications for places in full time education.

The higher demand for student accommodation due to this increase in attendance is stretching university accommodation to the limit. Demand is just not being met by supply.

Universities can only cater for a certain number of students through their own subsidised university accommodation. As university budgets become more stretched by the increase of students, they have tough decisions to make. Universities are more likely to invest their limited funds into educational purposes rather than into accommodation. This leaves private accommodation to fill the gap and makes student buy-to-let investment accommodation look increasingly attractive. Government funding also comes into play here. With huge cuts to university funds already announced and potentially more in the pipeline, the funds already earmarked by universities for subsidising student accommodation are likely to be questioned and reassessed.

Compared to traditional buy-to-let investments student accommodation can offer the prospective landlord higher yields and low void rates in a market that is perpetually under-serviced.

Traditional Buy To Let Student Accommodation
High rental yields? No Yes
Fully managed investment? No Yes available
Property supply low No Yes often close to universities
Low void periods Not always Yes
Rental growth in last 5 years Low UK wide Yes solid increase UK wide
Rental growth expected to rise Unknown Yes
Resilient in bad economy No Yes

Student accommodation investments are also proving recession proof; whatever happens in the property markets, students are still going to universities and colleges and will always need somewhere to live.

  • Student accommodation has seen significant rental growth over the last five years and this is expected to continue into the future;
  • According to independent research carried out by Knight Frank only 50% of all students in the UK have access to high-quality purpose-built student accommodation;
  • This figure drops dramatically to 20% when you employ the same criterion to London alone. This means that in London there are nearly 100,000 students who do not have access to purpose-built student accommodation;
  • The demand that this creates makes for a market with huge demand and limited supply, keeping rents high and your student property occupied;
  • The UCAS.com has reported a 12% rise in university applications for 2010-2011.

Student accommodation investment funds

Many investors have avoided the student accommodation market due to fears about collecting rents, empty buildings and, above all, damage to the property from wayward student parties. This assumption is wrong on many levels, for a start, the old stereotypes of hard-drinking, drug-taking student ravers are misconceived. A university place is no longer grant-funded or an ‘easy option.’ Most students are diligent people who are at university with the single-minded purpose of obtaining their qualifications. Add to this the fact that a significant number of students are mature students or foreign students who have paid a great deal of money for a UK education and a very different picture emerges.

For those who still worry about such things (and inevitably, such things do still happen) the best and easiest option is to have your student property managed by a letting agency that specialises in student lets. Many of these will offer you guaranteed occupancy rates and will deal with deposits and changeovers to leave you with complete piece of mind. All you need to do, having done your maths correctly in the first place, is check your bank account.

Different types of student accommodation to invest in:

  • Private halls of residence

    Private halls of residence are purpose built student apartments, usually built in clusters with shared facilities such as kitchens and bathrooms (although en-suite rooms are usually preferred by students). Private halls often fill the space left by over subscription to the Universities’ halls and are at the higher end of the market, usually housing students with a higher budget such as international students. These apartments are normally managed on-site with 24/7 security and maintenance making for great accommodation during the first year and providing a worry-free environment for parents and a hassle-free investment for investors.

  • Shared houses

    Standard 3 or 4 bedroom houses that have been converted for multiple, shared occupancy. Normally these will have private bedrooms with shared bathroom and kitchen facilities. Some will feature a communal living room whilst others will have converted the living room into another bedroom, increasing rental income. There are excellent websites such as spareroom.co.uk to help market the flat share, this is a far more improved site for finding accommodation when compared to the older Gumtree.com

  • Private flat or apartment

    Normally located in a residential block, a private studio or one bedroom flat means single occupancy which tends to attract higher rents. In general private lets will appeal more to mature students, post grads and overseas students, all of whom will, statistically, have a higher accommodation budget throughout the course of their education. They will expect higher quality and an excellent location.

Student accommodation mortgage restrictions

If you wish to let your property to students you will need to check with your mortgage lender about any restrictions there may be on the type of tenant allowed. Some mortgage companies do impose restrictions and students are one of the restrictions commonly imposed. Be sure to research this carefully otherwise you could end up letting your property illegally and there have been cases of mortgage companies asking for back-pay in the form of the difference of interest rate they would have charged you for that mortgage product versus the lower interest rate one you might have achieved.

  • Normal residential property lenders take a good look at the borrower’s ability to repay the loan with particular attention given to affordability and past employment history;
  • Buy-to-let property lenders, in comparison pay more attention to the property itself, its location, average void periods in the area and resale-ability of the property. The initial deposit required to secure the mortgage will also be higher, maybe up to 60% LTV when compared to a normal residential mortgage due to the higher risk proposition taken on by the lender.

Houses of multiple occupancy (HMOs)

If there are more than 3 individuals sharing your property then it will need to fulfil the regulations regarding Houses of Multiple Occupancy (HMOs). Normally this will involve your property being assessed by your local authority. In England the fine for an HMO that does not conform to regulations is £20,000 so be sure that you conform to all local planning laws.

With student accommodation, like any buy-to-let investment, rental income is driven by location, quality and demand. The best place to start your research is with the universities themselves where the accommodation office should provide a potential investor with much of the information they need.

Student accommodation investment – Are high returns associated with risk?

The newspapers and the property companies selling student accommodation investments quote gross yields of between 6% and 10% (some quoting 20%, hmmm…) which in any market, especially today’s, even at the lower levels quoted are quite acceptable returns.

Of course by nature of being young and carefree students often can create more maintenance hassle and maybe even become bad or slow payers of rent. These are some of the risks of owning student accommodation if it is not managed properly by a third party.

Given the apparent risks perhaps the higher return on your investment is simply down to a lack of demand for these ‘alternative investments’. Investing in student housing was, in the past, something small time landlords might do by purchasing a large run down house near a university, sprucing it up a bit, dropping in IKEA furniture and renting it out to separate students. The return was high but so was the hassle of the students.

With student enrolment at an all time high and only looking stronger there were bound to be professional student housing builders and management companies set to capitalise on the increased demand over supply. That model has been occurring worldwide over the past decade or so. Maybe you should ask yourself how many of your friends have ever mentioned the concept of investing in student housing versus investing in buy-to-let properties? Very few investors think of this lucrative niche market and that is part of the reason the returns are as high as they might be. Couple this lack of investor demand together with the difficulties of obtaining finance and you will see that a lack of vision and the high deposit required on buy-to-let mortgages create barriers to enter the market which helps sustain a higher than average return on investment.

Consider the Google.co.uk search numbers

There are other things to consider before deciding to invest in student accommodation. There are 168 universities and higher education colleges in the UK, giving the investor many options as to which location to choose to invest in student accommodation. Not all of those locations will be equally successful as an investment. Variations in property prices and local rental incomes will affect the income from a student let. Other points to consider when deciding on an area to invest in student property are: the student drop-out rates and the amount of accommodation already available to students in the area, the current supply and predicted supply from proposed developments.

  • The following data shows investors actual student accommodation demand for the larger university towns and cities within the UK. The numbers reflect real life searches by the UK population on Google.co.uk in August. We used the [Exact] search volumes for these phrases, see the Google Keyword Tool
[student accommodation london] 5,400
[student accommodation manchester] 1,600
[student accommodation sheffield] 1,600
[student accommodation nottingham] 1,600
[student accommodation liverpool] 1,300
[student accommodation leeds] 1,000
[student accommodation bristol] 1,000
[student accommodation newcastle] 880
[student accommodation plymouth] 880
[student accommodation brighton] 720
[student accommodation york] 720
[student accommodation loughborough] 590
[student accommodation leicester] 590
[student accommodation preston] 590
[student accommodation edinburgh] 590
[student accommodation canterbury] 590
[student accommodation cardiff] 480
[student accommodation coventry] 480
[student accommodation glasgow] 480
[student accommodation southampton] 480
[student accommodation lincoln] 480
[student accommodation huddersfield] 390
[student accommodation exeter] 390
[student accommodation aberdeen] 390
[student accommodation portsmouth] 390
[student accommodation hull] 320
[student accommodation bath] 320
[student accommodation dundee] 320
[student accommodation bournemouth] 320
[student accommodation norwich] 320
[student accommodation oxford] 260
[student accommodation sunderland] 260
[student accommodation swansea] 260
[student accommodation belfast] 260
[student accommodation chester] 210
[student accommodation guildford] 210
[student accommodation middlesbrough] 210
[student accommodation hatfield] 210
[student accommodation salford] 170
[student accommodation reading] 170
[student accommodation bradford] 140
[student accommodation cheltenham] 140
[student accommodation stafford] 140
[student accommodation uk] 110

Finally, if it is your student accommodation investment and not part of a larger scheme, don’t treat your student tenants any differently than you would anybody else. Decent facilities, well-furnished rooms and extras like Wi-Fi will not only increase the rental potential, they will increase the quality of the tenant and decrease the risk of damage to your property and its contents.

More detailed article on student housing investment funds.

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