Student accommodation vs hotel room investment

What’s the best property investment for income?

There’s an element in the UK housing market that many property investment gurus have only recently realised as a big factor in rising rental prices. It puts a wedge of extra demand into the private rented sector and is among the 108 data points which we research when looking for the best places to invest in property UK. I’m talking about the growing numbers of students in higher education.

In this article, I’ll look at the effect of a student population on market rents, and compare student accommodation and hotel rooms as property investment strategies.

Record numbers of students are pushing up rents

When Tony Blair’s Labour party swept to power in the 1990s, it did so with the wave of a promise to provide “education, education, education”. A decade  later, record numbers of 18 and 19-year-olds are leaving home for the first time and going to university. In 2015, 235,000 18-year-olds were accepted into universities in the UK. But that is, literally, less than half the story:

These students vary in age, race and religion. They have a number of first languages. They study an enormous range of subjects. There is one thing they all have in common: they all require somewhere to live.

This huge and growing extra demand pushes up rental prices in university towns and cities. Researchers at spareroom.com have calculated that student rents in some university cities have increased by 10% this year.

Student accommodation is scarce

With such a sizeable influx of students into the system, it’s not surprising that student accommodation is scarce. The cap on undergraduate numbers was lifted in the 2015/16 academic year. Some universities made students living on campus share rooms in their halls of residence.

The private rented sector has responded to this demand by providing private halls of residence and rooms in shared houses (house in multiple occupations, or HMO). Some people have taken in lodgers in their spare rooms.

The demand for student accommodation has had a direct knock-on effect on general rents, which are rising at a greater pace in university cities than elsewhere.

Student housing – the opportunity

As far as property investment opportunities go, on the face of it, the rising numbers of students is a market offering some great returns. Demand is growing, rents are higher, and the potential to rent on a room-by-room basis maximises income potential. That’s the story, and it’s a good one. Private rented halls – effectively blocks of ‘student pods’ in shared accommodation – are being aggressively marketed, with promised income of around 8%.

Student housing – the issues

What you rarely hear is the downside. 99% of students are first-time renters. They are strapped for cash, enjoy the party life, and have never had to budget before.

Now I’m not saying that student accommodation is usually left in a less than desirable state… no, I am. One of the major drawbacks with renting to students is that they tend to live with little regard for your property. Damage and unclean conditions aren’t caused on purpose, but student accommodation is notorious for the expense of preparing it to be lived in – both before and after a lease.

If you invest in a property to lease as an HMO, you’ll also have to meet a whole realm of legislation. If you rent out an unlicensed HMO, you could be fined an unlimited amount.

You’ll have to apply for a license, ensure that electrical and gas safety certificates are up to date, that smoke alarms are installed and maintained, and that all local authority regulations are adhered to. There are also regulations that cover furniture (Fire and Furnishing Regulations) and General Product Safety Regulations. You’ll need to keep on top of these: they change regularly, and ignorance of the law is considered to be no excuse for non-compliance.

As the landlord, you are responsible for the upkeep of all common areas – stairs, landings, hallways, and gardens.

One other thing – if you let via a university or college, you can expect your property to be regularly checked by them. If your property falls short of its requirements, you’ll be blacklisted. Should this happen (and it’s an occurrence more common than you might expect), you’ll be blacklisted, and bang goes your income.

Contrast and compare to hotel room investment

Like student accommodation, an investment in a hotel room offers you a steady income, typically around 8%. That’s about where the similarities begin and end.

Student accommodation and hotels are both managed premises. The difference is that the rent a student pays is the beginning, middle, and end of the student accommodation revenue stream.

Hotel management works hard to make its guests feel welcome because doing so increases revenue and profits – and that feeds into bonuses for the management company. You’ll find that a hotel room investment is way better looked after. A well-presented room encourages bookings, and those bookings bring the extra money needed to invest in other facilities, such as conference rooms, gyms, spas, and restaurant upgrades. These are all revenue-generating facilities and just a few of the profit opportunities that don’t exist to support the guaranteed income from student accommodation.

As it’s business in a thriving industry, hotel room values tend to rise. These values are aided by maintenance programmes that are put in place to encourage guests to return time after time and increase hotel room rates. At the end of your investment term, the hotel owner wants to buy your room to retain all the profit going forward.

Student accommodation is notoriously difficult to sell on. It needs expensive repair and maintenance work to bring back to the standard required to let to students. You’re left to rely on the owner to repurchase your investment – and there are plenty of horror stories where the investor has lost money because the owner bid way below the original price on the buyback.

If you want a solid property investment that offers great income and a guaranteed capital gain after five years, download my book about hotel room investment. It’s free and explains everything you need to know to make an informed decision.

If you have any questions about hotel room investment and how it could fit into your property investment portfolio, call one of the team on +44 207 923 6100. In the meantime,

Live with Passion

Brett Alegre-Wood

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