A shortage of student accommodation is driving up rents
More than a year ago I wrote about how buy to let investors should consider student lets because of the higher yields on offer. This advice is now going ever more mainstream with the Financial Times and other reputable papers talking about the many advantages of investing in student accommodation. In light of this I thought I’d revisit the subject with the latest updates and market news. But first, a quick backgrounder to the subject.
Why is student accommodation an attractive investment?
The main reason is that it continues to offer higher yields than most other sorts of buy to let investments. Yields of about 6% are not at all uncommon in this market mainly because it has been ignored by the mainstream of property investors for some years now. The reason (and I’ll go into this in more detail below) is that there is high turnover among students and high rental voids, with properties often standing empty over the summer months. That adds to costs and having to find new tenants every year is a real hassle. Fortunately, because most landlords have not been bothered, yields have climbed enough to compensate investors for their trouble.
Are the big players interested?
They are. Some big hedge funds and property investors have recently started making really big bets on student accommodation. Oaktree Capital Management has said it plans to invest £1 billion in this market through Knightsbridge Student Housing. Other big institutions have also been sniffing around in UK residential property with student housing getting a lot of attention. I would expect more of this over the coming year or two as big fund managers look for alternative investments that generate good yields with lower risk and volatility than stock markets.
Rental Yields are High
A comprehensive report by Knight Frank, an estate agency, in which it looked at more than 20,000 student lets across the country, found that rental yields on student accommodation in London were 6.38% in 2010 (from 6% the year before) and in the main regional markets were as high as 6.75% (from 6.5% a year earlier).
Student Rents are Rising
Student rents in most parts of the country have been rising quite steadily. In 2010 they fell back a bit in London, but rose by 4-5% elsewhere and Knight Frank forecasts another rising this year in London and elsewhere. This comes after average rental increases of 5% a year over the 5 years to 2010.
Demand is High and growing
The student population has grown at a huge pace over the past few years, mainly as a result of the government trying to encourage more people to go to university. This has led to a huge shortage of space in many university towns.
But there is a risk that demand could be squeezed. The government is allowing universities to bump up fees this year and that may cut the numbers of new students going into the system. It may also push large numbers to stay at home with mum and dad to cut costs rather than to go to a university in another town. Even so, Savills, another property agency, said it expects a shortfall of more than 22,000 beds in student housing over the next five years (it said this in a 2010 report that you can down from their site – registration required)
Their main conclusion is that:
“Purpose-built student housing completions are expected to remain lower than the annual increase in new additional students.”
What are the most attractive towns for investing in student housing?
The market for student housing is basically divided into 2 parts. One is London, where there are more than 40 universities and tens of thousands of students from within the country as well as foreign students. The other is the cluster of regional towns including Oxford and Cambridge, where the towns are much smaller in relation to the universities and flows of students dominate much of the demand.
Knight Frank lists the following towns in order of attractiveness based on the number of universities, growth in student population, supply and demand and a few other ranking factors. In the order of most attractive, the top five it lists are:
- London
- Kingston
- Brighton
- Edinburgh
- Oxford
What is the most attractive sector?
Knight Frank thinks that the biggest area of undersupply at the moment in London is for what it calls “value accommodation” in the price bracket of £15-200 per week. In the regions away from London there is more demand for higher-end accommodation that couples, mature students or post-graduate students might want.
What do Student Flats Cost and how much is the rent?
Small studio flats (not purpose-built dormitories or single rooms in bigger houses) vary considerably depending on the area. A city centre flat in Bristol might cost £150,000 or so, whereas in Edinburgh a similar property might cost £177,000. Typical student rents in these areas might be in the range of £650 -£ 750 a month, according to an article in the Financial Times (registration required).
Average rents per week for a studio flat, according to Knight Frank, are (for 2011)
- London – £275
- Regional Towns – £136
- England and Wales – £178
What are the disadvantages of investing in student housing?
The first is mainly because of the risk of damage to property. Students often know they will only be in a place for a year and may throw some wild parties. Many students will also smoke (all kinds of things, legal and not). That said, the perception is generally far worse than the reality and most students are mature and sensible. Many will also be post-graduates in their mid 20s and are likely to show respect for a property.
The second concern is about turnover. If you have to find new tenants each year it adds to your administrative burden as well as costs since it is sensible to run proper tenant checks and credit checks on all of them. Some of this work can be done by a letting agent, but you would still need to check and satisfy yourself that it has been done property.
There are some ways of cutting costs on this. You could cut out the letting agent entirely (saving you some 7-10% of the gross rent that you would collect) and advertise yourself. A good place to start would be with accommodation officers at the universities.
Managing the risk of student lets
Students are generally not likely to have enough income or a decent credit record to stand as tenants on their own. It is thus often essential that you get their parents to sign as guarantors. This means that the parents guarantee that the rent is paid in full. If you do this you should also do a full tenant check and credit score on the parents. Ideally you want to find parents who own their own home. This means you have a fixed address in case things turn ugly and you have to send the bailiffs with an order for payment.
Actively try to let to older students or post graduates as they are more likely to be more responsible.
What else to look out for
When you get landlords insurance double check the terms and conditions very carefully as some policies exclude students. You may also struggle to get rent guarantee insurance for a student let, especially if you haven’t got the parents to be signing on as guarantors. In that case you might want to ask for a slightly larger deposit.
You may also struggle to find a mortgage lender willing to finance a buy to let investment in student accommodation as not all agree to this.
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