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Also known as ‘student studios’ or ‘student pods’, specialist student accommodation is a far cry from the typical norm of buy-to-let properties. It is viewed as an asset by investors who seek low risk (tenancy rates are 99%+) property investments that typically yield an assured 7-9% rental return, without the day-to-day responsibility of maintaining and letting the property themselves.
In the UK there is currently a structural under-supply of specialist student accommodation – in the core university cities, typically only around 25% of students can be catered for in private specialist accommodation and university-run accommodation, as opposed to rooms in residential houses or Houses of Multiple Occupation (see below).
More students are applying to UK universities year-on-year1, despite the recent rise in tuition fees, and the demand for high-specification specialised student accommodation is rising. In his Autumn Speech 2013, the UK Chancellor announced that the cap on the number of students permitted by UK universities is to rise by 30,000 in 2015, and in 2016 the cap will be removed altogether.
UK education is also renowned globally for its high quality2 and internationally competitive fees3, leading to a continual rise in applications from foreign students – helped significantly by current UK government policy4 - the overwhelming majority of which prefer to live in specialised accommodation
With a relatively low percentage of students being able to be housed in university accommodation, specially designed developments are fast becoming very popular with both investors and students, and there is plenty of evidence suggesting the existing investment trend will continue for some time yet.
Student accommodation in the UK is changing, and developers are being encouraged by many local councils to create student units where high quality is teamed with a superb use of city-centre space. Developers are happy to do this as higher rents per square metre are obtained from students5 – this is the foundation of the business model, which makes it worthwhile for specialist developers not only to create the accommodation, but also offer investors an assured yield for a fixed period.
These factors are now providing investors with the opportunity to build up a portfolio of profitable and hassle-free property investments
From a UK or foreign students' point of view, the units are purpose built to a high specification that makes use of all the space available, giving each student a ‘home from home’ with all the features and mod cons they enjoy. Broadband, workspace, bedroom space, bathroom and often kitchen are usually included in one unit; giving students the independence they want after leaving home to study. Additionally, there will usually be other on-site facilities such as security, laundrette, safe bicycle storage, gymnasium and communal areas – at a rent that is priced to compete with other local accommodation, be it university-run or private
It typically offers better returns than standard buy-to-let property – net yields (often assured) are 7-9%, compared to the national average gross yields of 6.3%6
Converting standard private property into student accommodation is contributing to a boom in some of the UK’s most popular cities and large towns. However, according to real estate adviser Savills, conventional families are potentially being priced out of the market because these properties (now known as ‘Houses of Multiple Occupation’, or ‘HMO’s’) are giving Landlords and owners more of a rental yield. They can profit more from students than families – yet there is still a high demand for student accommodation hence the need for purpose built properties to be created.
Consequently, purpose-built student accommodation projects are being encouraged by councils, as they will free up private properties currently being used as HMO’s, which should help the issues associated with balancing accommodation needs for families and students. In fact most City councils have now issued an Article 4 Direction – this is a regulation that compels landlords who wish to operate HMOs with more than three stories (including basement and attic) to obtain a permit, designed to ensure certain basic levels of amenities and standards. This discourages many potential HMO landlords, or increases the costs for existing landlords – causing rents to rise as it either restricts potential supply, or landlords to pass the costs onto tenants – making specialist student housing even more attractive.
Investing in UK student accommodation is a great alternative to buy-to-let. In addition to the higher average net yield, it offers a ‘bite size’ chance to invest with far fewer management headaches. With UK student accommodation outperforming all other types of UK property investment over the past few years, and with demand looking like it will exceed supply for some years yet, now is the ideal time to take advantage.
Purpose-built student accommodation is eligible for your pension fund, but not individual flats or houses (HMOs). This means that if you buy purpose-built student accommodation through your pension scheme, the income will not attract income tax, nor will the property attract capital gains tax. [Note that this is intended as a guide, and that Go Global Investments Ltd are not licensed or regulated to give financial advice. So please verify with your financial advisor, accountant or tax advisor as appropriate, that this applies to you]
If you are not resident in the UK, then you will typically not attract capital gains tax upon the sale and profit of any purpose-built student accommodation. [Note that this is intended as a guide, and that Go Global Investments Ltd are not licensed or regulated to give financial advice. So please verify with your financial advisor, accountant or tax advisor as appropriate, that this applies to you]
Modern specialist student accommodation developments are managed by specialist management companies. Consequently the benefits to investors are huge in terms of costs and time. In particular, economies-of-scale are achieved with regards to maintenance costs, and landlords do not need to spend time advertising and vetting potential tenants. The management companies also make sure deposits are taken from tenants and the correct holding procedure is observed, as well as paying rental monies due to landlords – usually quarterly-in-arrears
• Investment properties are usually around £45 - £80k
• Sustainable and assured 7-9% net yields are the norm
• Recession-resistant – university applications usually go up in times of economic slowdown
Student housing that is built-for-purpose has proven that it is a worthwhile addition to a real estate portfolio for both UK and international investors.
Go Global Student carefully review the market for the best opportunities, which we then recommend to you. These opportunities are the ones with realistic yield projections, and with developers and management companies with proven track records
Investors must still satisfy themselves on the most important issues, which Go Global Investments will help you with.
The location - the universities with the best reputation will likely always have the greatest demand for places from both UK and international students – therefore it helps if you pick the cities/towns with the institutions that are part of the elite 24-strong Russell Group of Universities for example, and keep an eye on the university league tables.
The closer the development is to the university campus, the more popular it tends to be with students – providing support for your rental income
The developer - are your funds secure? Check with your lawyer that mechanisms are in place that a) give you a charge on the land from exchange of contracts and b) investors’ funds can only be used solely for the intended development, and only in stages, dependent on the appointed surveyor or architect’s approval.
Consider how much experience the developer has with the creation and construction of student accommodation, and other projects if appropriate. If sufficient experience they are more likely to know what today’s students demand in terms of accommodation, mod cons, space, communal areas and amenities.
The management company - think about the management company that will maintain the property, collect rents and manage the building and its operations. Have they achieved 100% occupancy, or at least a very high level of occupancy, in the past? They should ideally have plenty of experience in successfully managing student accommodation.
If the management company is also the developer (or a related company), it tends to offer more security as they will have a longer business horizon for the project, and a vested interest in maintaining the longer term needs of the investors and students – ie they will want to maintain both the financial and physical quality of the investment to ensure future developments are invested in, and that it remains popular with students to ensure maximum occupancy
Are the projected yields realistic and sustainable? Compare required rents with local university-run accommodation and, if available, similar private specialist student accommodation. Check whether assured rents include all costs, like ground rent, for example, to give you an accurate net yield
You should be able to sell any time after exchange of contracts.
2Source: Atlas of Student Mobility, Institute of International Education
3Source: UK government – International Education: Global Growth and Prosperity
4Source: UK Higher Education Unit
5Source: Paragon Mortgages
6Source: Mortgages for Business Buy to Let Index Q2 2014
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