Not All student accommodation is equal
When it comes to property investment opportunities, there is a lot going for investing in student accommodation. A recent Knight Frank report about specialist property highlighted just what a strong sector of the property market student accommodation has become. A few years ago, I’d have warned against investing in student accommodation. But things have moved on. As Knight Frank says in its report, “the student housing sector is now widely regarded as a relatively mature sector”.
There are several options to take advantage of when investing in student accommodation. In this article, we discuss what makes property investment into student accommodation so attractive. We also examine the difference between purpose-built student pods and student apartments, and I’ll tell you what my preference is and why.
Why student accommodation for property investment?
Since Tony Blair made ‘education, education, education’ the central focus of the Labour party in the 1997 election (which it won), higher and, further education has become recession-proof. When there are no jobs for school leavers, most choose to go to university. When there are jobs to be had, youngsters go to university to improve their chances of better jobs and higher paying careers.
Other reasons for investing in student accommodation include:
- Almost every year, student admission numbers hit a record. In 2015/16, the university population in the UK numbered around 2.8 million.
- Universities haven’t been able to keep pace with demand for accommodation. Consequently, the private sector has been growing.
- Student accommodation rents increased by an average of around 3.2% in 2016.
- Rents are expected to grow by another 3% in 2017.
Wouldn’t you want to invest in a market where demand is strong and growing, rents are rising, and recession appears to have little or no effect?
Property investment choices for student accommodation
Thirty years ago, students mostly stayed in halls of residence or grubby, poorly-managed house shares. Students today expect far more. While many first-year students will receive the option of a place in a university dormitory, most second-year students and above will live in the private sector. Today, students want to live in purpose-built developments with gyms, community spaces, Wi-Fi, and so on.
Typically, your options as an investor will be to buy a student pod or a student apartment. To decide which is best, you need to know what they are and the investment pros and cons of both.
What is a student pod?
A student pod is essentially a studio flat, but without the kitchen. Students who live in one of these have a single dual-purpose room and (usually) an en-suite bathroom.
What is a student apartment?
A student apartment is a much bigger living space. There may be a single bedroom, but more commonly two or three bedrooms. Often, each bedroom will have its en-suite bathroom. Also, the apartment will have a communal living area and kitchen.
The benefits of student accommodation for the property investor
The pros and cons of student accommodation include:
- A Set and Forget property investment, benefiting from dedicated building property management
- High rental returns
- The potential for students to become longer-term tenants
You’ll also find that rents are guaranteed. If you invest in a student pod, it's often the developer who guarantees them. If you buy a student apartment, it’s the parents of the students who become guarantors.
Rental yields are higher than most other property investments, too. Typically, you’ll be rewarded with a yield of around 9% or 10%.
However, there are some differences between student apartments and student pods of which you should be aware.
The rent guarantee on a student pod may not be quite as cast iron as it appears. For a start, many student pods are sold off-plan. You’ll need to do your research on the developer, check their reputation, and make sure they have a track record of delivering quality student property on time.
And while student pods can be bought with relatively low capital (usually around £50,000 to £75,000), it is notoriously difficult to get a buy-to-let mortgage to finance your investment.
When you invest in a student apartment, you are more likely to be offered a mortgage, and so can take advantage of the benefits of leveraging in property investment. Primarily, this means making money on other people’s money – and therefore increasing your effective yield.
And talking about yield, if you rent out an apartment by the room, you are less affected by void periods. Not only do you benefit from two or three lots of rent and often a higher yield than achievable on a student pod, if one student decides to leave, your property doesn’t lose all its income.
Finally, student apartments, contrary to popular belief, tend to be better looked after than student pods. When there are three students living in an apartment, two good student tenants tend to ensure that the third gets their act together, keeping the place clean and tidy. And when to comes to finding new tenants or selling to another investor, this means less maintenance work to do and a cheaper cost of turnaround.
In summary, my preference when I invest in student accommodation is to buy a whole apartment rather than a pod. I’ll benefit from the strong education sector and these main advantages:
- Benefits of leveraging, when using a buy-to-let mortgage to invest
- Rent is guaranteed by parents who don’t want a red flag on their credit history
- Probable higher yields, because of multiple occupants and multiple streams of rent
- Usually better-taken care of by multiple tenants
- Set and Forget property management
Our research team has identified some incredible property investment opportunities in the student accommodation space. To find out more, and how easy it is to invest for market-beating net yields, contact one of our team today on +44 (0)207 923 6100.
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