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Investing in Purpose-built Student Accommodation
Student accommodation in the regions (England and Wales) only marginally underperformed the wider IPD All Property Annual Index in the year to December 2010, with total returns (income and capital values) of 14.65%, against London’s 8.41%
Knight Frank Student Accommodation Report 2011
Our Investments Director, David Burgess looks into why this type of purchase is making such good sense..
First, let's take a look at the market
Traditionally, accommodation for students was confined to two choices..halls of residence or private landlords. For the first year at University, students would live in halls of residence and then move out into privately rented flats or shared houses. As the numbers of students has increased over the last 15 years there has been a need to provide more and more quality accommodation to meet growing demands.
This market has grown significantly over the past 10 years in line with increasing student numbers, from 1.8 million in 1996/97 to 2.4 million in 2009/10. Additionally, the number of applicants continues to rise, figures at the end of August 2009 showed an increase of 10.1% on the previous year.
Universities don't have the resources to invest in accommodation, this will be more of an issue in the coming years as public spending becomes more restricted. Traditionally, universities have offered to provide accommodation to first year students, but the latest estimates are that outside of London only 85% of first year students can be catered for in this way. The remaining 15%, plus second and third year students have to find their own accommodation...that's a lot of students.
Numbers of overseas students are steadily increasing. This growth is being driven by universities, as a foreign student quota increases income and reputation for each establishment. In October 2009 UCAS reported a 16.6% rise in applications from foreign students.
Due to difficulties presented by the new Houses in Multiple Occupancy legislation, many present landlords are dropping out of the student accommodation market and new ones are being discouraged from entering. The rulings relate not just to increasing regulations for individual properties but also to restricting the proportion of housing in an area being occupied by students, in attempt to prevent over-concentration.
Rental growth in student accommodation has consistently outgrown RPI.
The Student Housing market is currently estimated at ￡6.6 billion and is estimated to grow to £20 billion over the next 6 years.
Who Invests in this Market?
There is a number of specialist companies who own and manage student accommodation, the largest of which is the Unite Group, a listed company. There are also a number of specialist Funds that specifically invest in student accommodation. These have shown steady and encouraging returns. One of these funds, which was launched in June 2000 has shown an average annual return to investors of 9.7% - the result of steadily rising rents plus excellent occupancy levels. Bear in mind here that rental price increases have not lessened demand.
The Savilles Report of 2009 states 'Rental growth prospects and high occupancy rates ensure that student housing will remain a key investment sector. Rental growth in the student sector has been consistently over and above RPI and is combined with an underlying supply/demand imbalance.'
What are the Key Benefits?
- Consistent yield – up to 6% net currently
- Hands off, passive investment,
- no hassle Investors return unaffected by void periods
- Strong rental demand that continues to grow
- Capital Growth with general rise in property values
Investment Illustration
- Using a 4 bed apartment in Sheffield for illustration -
- The cost of the apartment is ￡201,813.
- The weekly rent per person is ￡86, so for four beds ￡344.
- The standard tenancy is for 44 weeks – Total rent ￡15,136
And finally, here's more from the Knight Frank Student Accommodation Report 2010 Demand for university places continues to rise. Preliminary figures suggest a further increase in demand for places in the 2010/11 academic year, with UCAS reporting a 12% rise in applications at its October deadline.
As an asset class, the student accommodation sector is maturing and becoming recognised as an important element of the wider property investment market. Since mid 2009, there been increased demand for secure income producing assets and demonstrable yield compression.
Typical FAQs (we will use the Sheffield properties as our example)
What happens if my tenant leaves during the year?
A proportion of the management charges is set aside as security to cover this eventuality, so investors will not lose out financially.
What procedures are in place to ensure rent is paid?
The management company has significant experience of managing this type of accommodation. When a reservation is made it is secured with an advance rent and Bond. Rents are paid a term in advance and also a guarantor has to be provided.
Who pays the cost of any damage?
For starters these apartments have been designed and build with 'robustness' in mind, so wardrobes, desks, and cupboards, etc are built in. The tenants pay for any damages, either when the damage occurs or at the end of the tenancy. Safeguards for the investor are that there is a bond to cover the costs of damage and also a guarantor 'back up'.
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