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Investors looking at student property
are presented with two main options: a
student property fund (which includes
both UCIS and regulated funds) or
leasehold purpose built student property.
Investors should approach both of these
with caution: student property funds are
very complex and may require specialist
investment advice; a large number of
leasehold property investments have been
launched with little thought or research into
local student demand or the exit strategy for
investors.
The majority of funds are now well
established with essential experience of the
UK student accommodation market and
have achieved consistent returns over the
last few years. It is also likely that they have
sufficient capital resources should rental
demand fall in the short term or extensive
maintenance be required to the underlying
accommodation. Investors should feel in
safe hands by investing in a student property
fund, although the returns on offer may not
match those being marketed for leasehold
properties.
The purchase of a leasehold student
property should be considered as a high
risk investment, even though the investor
will own legal title to the property. These
investments will focus on the macro case of
there being a huge undersupply of student
accommodation in the UK, but investors
should ask questions about demand from
local students and evidence of a resale
market before considering the investment
further.
PRICING
Pricing varies dramatically across
investments and can range from £45,000
to £100,000 for a single bedroom or studio
apartment. A lot of this variation can be
attributed to location i.e. London is likely to
be much more expensive than Newcastle,
but can also be dictated by potential returns.
Many student property investments are
valued on their potential rental yield. This
is the same technique professional fund
managers use to value the assets within a
fund. Investment providers may price the
property according to the predicted yield
they believe it will achieve. This is calculated
by dividing the annual income (rent) by the
percentage yield (8% p.a. for example). I.e.
Annual rental income of £5,000 divided by a
yield of 8% would equate to a property value
of £62,500. Providers will then use the annual
yield as one of the main marketing tools.
This makes it hard to compare student
accommodation to traditional buy-to-let
property and also to other like-for-like
property investments, as the price will be
based on its potential yield rather than the
value of the physical property.
If rental income increases year on year then
so would the value of the property, this is
known as ‘mark-to-model’ valuation. This
doesn’t mean that someone is willing to
buy the property for that price on the open
market and could be a huge stumbling block
for investors when they come to sell the
property as it may not be worth as much as
they had expected.
Valuation on the basis of what someone
might pay for the property is ‘mark-to-
market’, this is how residential property is
usually priced. Due to a lack of secondary
market for student accommodation the
‘mark-to-market’ valuation has not been
tested.
STUDENT PROPERTY INVESTMENT CRITERIA
Knight Frank have highlighted London and Kingston as the top two cities for student property investment. Our own analysis supports Knight
Frank in highlighting London as a strong investment location and it is clear that London does not have anywhere near as many purpose built
properties available as other cities in the UK.
Further factors that investors should consider include:
•
The ranking of the university – if demand is predicted to stay strong for the university then it should result in long-term demand for
accommodation
•
The gap between demand and supply of accommodation – there must be proven capacity and demand for new accommodation to be
built. Too many schemes only focus on macro demand and do not take into account what accommodation is currently being built in the
local area
•
The number and % of international students – international students favour purpose built accommodation and can often afford higher
rental prices. If the university has strong demand or increasing demand from international students this should signal a need for
investment
•
Net yields – looking at rental income alone does not give the complete picture as it does not take into account all of the costs to the
investor. Accommodation in London may achieve the highest rental income but it is also likely to have the highest costs of any UK
location. Cheaper locations might result in a better net yield for investors
• Exit - it is very unlikely that banks will give mortgages on student accommodation, limiting the re-sale market for investors.
Based on these factors, Manchester, Bristol and Oxford are considered to be strong investment locations. Of course, thorough analysis
and due diligence would have to be undertaken before a decision on whether to invest is made.
INVESTMENTPOTENTIAL
