Student investment properties: are they worth it?

Don’t be blinded by investment guarantees: consider the risks, too.

I’ve noticed a phenomenon on Facebook that’s starting to worry me. Not only me, either. I’ve heard from several clients and others interested in residential investment property who want to know more about the ‘student pods’ that are being marketed to them on social media. The income yield (sometimes as high as 10%) is enticing, but are they all they’re cracked up to be? What are the risks? Is it possible to get a mortgage to invest in them? What happens if the management team fails? And are the guaranteed capital gains worth the paper they’re written on?

In this property investment blog, I’ll look at all these questions and more, and offer an alternative that I think is a better property investment strategy to take advantage of a rapidly increasing student population.

Student accommodation: the new property investment growth market

Some of the best places to invest in property UK are university cities and towns. The rate of growth in the student population is a phenomenon in itself. Nearly half of all UK school leavers now go on to higher education. The 2014/15 academic year was the first in which more than 500,000 students took up university places in the UK. The vast majority of these are moving away from home for the first time, and need somewhere to live.

The traditional room on campus is in short supply. Universities simply haven’t kept up with the demand that has seen undergraduate numbers rocket from less than 10% of 18-year-olds in the 1980s. It has created a new market for property investors: the managed ‘student pod’.

What are student pods?

Student pods, or studio apartments, are simply rooms in a block that is specially built to house the student population. The block often boasts gyms, cafes, Wi-Fi and meeting rooms. They’re being developed in university cities and towns, either near to the university or in the city centre.

On the face of it, it’s a great idea. Especially for the student. A modern, well-appointed place to sleep and study. All the mod cons, and near to night-time entertainment. What student could ask for more?

However, what you should be concerned about is whether they pan out as property investment opportunities. You’ll be interested in their potential to offer income yield and capital growth.

How much do student pods cost?

I’ve seen a range of property investment advertisements in the student pod market. Prices start at around £40,000 and rise to £80,000 or more.

What are the promised returns?

These student pod property investments offer guaranteed returns of as much as 10% per annum, usually for a fixed term.

On top of this, some offer capital growth guarantees. I’ve seen one offer as high as 35% over a five-year period.

It’s easy to get enticed by these guarantees. They’re above the reasonable returns you could make on most other types of property investment. If you get a little suspicious, you would be right to. What the slick marketing doesn’t explain to you are the risks. And there are plenty.

You’ll need cash to invest in an off-plan student pod

Most of these student pod developments have yet been built. They’re off-plan property opportunities, and mortgage lenders aren’t very forward when it comes to offering finance. So, you’ll need to invest in cash.

However, investing in off-plan property investment isn’t the concern here. In fact, off-plan property offers some of the best property investment opportunities around: you get in on the ground floor, in an area that benefits from great infrastructure and regeneration spending. Student pods are risky for other reasons.

The student market could be reaching a peak

These off-plan developments are very restricted in their appeal – they are being designed specifically for a single sector of the market. What if the influx of students fails to materialise? After all, we’ve seen tremendous growth in student numbers – with the government now pumping apprenticeship schemes; it could be that student numbers are at or very near their peak. What then for your studio apartment, which is designed for a single-person living?

Even if the student market isn’t peaking, beware of the competition

Here’s another thing about student pod property investments: there are lots of them. They’re mostly off-plan, and just when your property is finished and ready for the market, there’s suddenly a lot of competition. Will the market demand be big enough? If it isn’t, those rental guarantees could mean little, and the value of your investment could fall quite substantially.

Management risk

Student pod investments come with the added bonus of little work for the investor. The developer offers them for sale with guaranteed income. A management company will find the tenants (getting the block put on the university’s list of student accommodation) and manage the property for the benefit of pod owners like you.

What if the management proves to be below par? Universities inspect their students’ accommodation options at regular intervals – and they are not shy when it comes to blackballing student digs. You could find yourself with a one-person pod, with no tenant, and a management team that has got itself (and your investment property) blacklisted by the University.

Exit strategy risk

Finally, there’s your exit strategy risk. Whenever you invest, do so with an exit strategy in mind, and be prepared for several scenarios. With this type of investment, your exit strategy is limited to two options:

  • Sell back to the management company
  • Sell to an investor who wants to invest in a student pod

The problem you’ll find is that if the student population hasn’t grown as much as expected, or the competition in the market means supply is higher than demand, your resale value could massively undershoot any guarantee you’ve been given. You won’t have any ability to do anything else with your student property investment. You could find your financial objectives have crumbled.

Is there a better way to invest to take advantage of the student population?

A growing student population is one of the factors that has helped to push rental prices up. It doesn’t surprise me that locations near universities and in university towns are seeing some of the highest rates of rental increases in the UK today. In many of these cities, rents rose last year by as much as 10%.

Rather than invest in student pods, you might be better advised to purchase an investment property that will be let as a house in multiple occupations. You can let this on a room-by-room basis to students, though you will need a license to do so. If you use a property management company to manage the day-to-day landlord affairs, you could benefit from the student rental market while limiting the aggravation a typical HMO landlord might suffer.

The advantages of investing in property this way include:

  • Investing in an area that benefits from the strongest property fundamentals
  • Maximising rental income from student rents
  • A flexible investment property that offers multiple exit strategies

With the right property investment, you really can benefit from the growing student population.

How to benefit from the growing student population

Before you invest in an off-plan student pod development, consider all your options. Research the area, look at what other developers are doing, and consider the history and experience of the accommodation management team. Go and talk to the universities nearby, and get to understand what it is they are looking for in terms and student accommodation and landlords.

Think long and hard about your financial objectives. If you want:

  • income guarantees;
  • known capital growth;
  • flexibility of exit options;
  • early-stage investment,

come and talk to us. We’ll get to understand your goals, aims and financial objectives, and discuss how property investment could help you achieve them. Contact our team on +44 207 923 6100 and join thousands of investors that are on their way to reaching their goals.

Cheers

David Lines

About the Author

Brett has over 20 years experience in all facets of property, he owns various companies centred around property and is the driving force behind the education and training at Gladfish. His companies have sold over £850 million in UK and London property and he manages over 1200 properties through his estate agency chain. Today he shares his time between UK, Australia and Singapore. He is married to Arlene and together they have 4 kids.

>