16 Dec Student accommodation FAQ’s
Student Accommodation Investment FAQ’s
Purpose built student accommodation (PBSA) has been higher on the shopping list than residential property for the majority of institutional investors for quite some time. It is only recently that it has been built for sale to individual investors on a room by room basis and it is proving extremely popular. However it should be approached with caution as there are good, bad and ugly student accommodation investments out there. Below is a list of FAQ’s.
Why do student accommodation investments achieve higher returns than ‘standard’ buy to lets?
Because students typically live in higher densities. With more people per square foot than standard residential property. Purpose built student accommodation also achieves additional rental by offering convenience and security.
Why do students pay more to live in purpose built student accommodation (PBSA) than in shared houses?
Primarily security, quality of accommodation and amenities along with a feeling of additional involvement in the student community. See fig 1.
Are running costs higher than normal buy to let?
They are higher than a standard buy to let because of the inclusion of bills. The running costs will generally be similar in percentage terms to a student house that has inclusive bills except that the management charge is likely to be lower due to economies of scale. If you buy correctly your net income on a PBSA investment should outperform standard buy to let by a long way.
What kind of returns should I expect on my student accommodation investment?
Around 11%-13% gross yield* and between 7 and 10% net of all costs guaranteed for 2 to 5 years. You should be checking the rents to calculate what the actual returns are as the assured figures are sometimes subsidised by developers. Actual net returns beyond the assured period are typically 7.5-8.5%, not factoring rent increases (estimated at 2-3% per annum). Always check whether the quoted figures factor in a void period for the summer term from between 1 and 9 weeks and whether they factor in ground rent deductions.
*Gross yield is calculated as total rental income divided by the purchase price.
How does this compare with buy to let?
The UK average yield for buy to let is reportedly 5.8% gross which will typically be 1-2% net return from rental income after running costs. Gross yield on standard residential buy to lets varies from around 2% gross in prime London to 10% gross for terraced properties in deprived areas let to local authority tenants.
What happens after the assured period?
By the end of the assured period you will have a choice regarding whether to continue with the existing managing agent or to change to a standard letting agent. The company managing the block should have been doing a good job and you can carry on. A good management company will have provided you with management accounts to justify all spending, kept the block in a good state of repair and occupancy rates should have been very high. Rather than a guaranteed income you will get all the costs deducted from your gross rent and be given the difference. If you have bought wisely and student rents have continued to grow at the same rate they have been growing in recent years, your income will be more than the assured amount.
What happens if my property doesn’t let after the assured period?
One of the great things about student accommodation is that the busy letting period tends to run from January to April depending on the location. If your property hasn’t let by April you can speak to the managing agent (including Broadgate) about why and still have May to September to do something about it. These months are still good letting months and every university still has students looking for a place to live just before the start of term. The largest provider of student accommodation in the UK currently run at 97% occupancy, on average buy to let property is tenanted for 94.5% of the year.
What are assured/guaranteed returns?
An assured return is a legal obligation that the developer will pay the return to you and the terms are included within the lease documentation that your solicitor receives. The assured returns are paid out from tenant rental payments. Usually quarterly in arrears.
Can I get a mortgage?
Generally residential buy to let mortgage lenders do not lend on any accommodation less than 30m2 in area and a standard student studio is usually around 18-20m2. Commercial lenders will look at student accommodation studios but on a case by case basis. We would advise that you buy on the basis that you are happy making a cash investment. Never pay a large reservation or exchange deposit without having confidence in a mortgage if the mortgage is essential.
Do I need to get insurance?
On most student accommodation investments, during the assured period you lease the property back to the developer and they sublet it to the tenants so they are responsible for landlords and contents insurance. Buildings insurance is part of the service charge which is part of the deductions made between the gross and net return. Beyond this the developer may offer an extension to the lease period. If not you will need to pay a small amount of standard landlord insurance but buildings insurance will be included in the service charges as with any residential apartment block.
Am I responsible for gas safety, and other compliance checks?
As long as the property is let to the developer they are responsible for these checks. A good management company will take care of them for you after that. We have been selling student accommodation investments to individual investors for nearly 5 years and we’ve yet to hear of a single client who has had anything to do regarding management. Everything has been dealt with by the management companies. Every student development we have sold to date does not have gas appliances
Am I responsible for chasing unpaid rent?
Another great thing about student accommodation is that you should have a guarantor (usually a parent). Your managing agent should do any required chasing. During the assured period it would not be your responsibility at all.
Am I responsible for repairs within my property?
In most cases repairs are included in the charges deducted from the gross rent. However ensure you check on each and every development. Students pay a deposit and any damage caused by students to the room come out of the deposit. Managing agents will usually deal with all of the repairs.
Can I manage it myself?
For most purpose built student accommodation investments the developer will select the managing agents during the assured period. While the developer is offering an assurance they want to maintain good standards within the development as they are taking the risk, allowing people manage their own may jeopardise this. Also the management charge on the developments is low at around 4-6% so you are saving little by doing it yourself. Most of the total charges are costs such as utilities and staff which come under service charges rather than management charges. It is important to remember that the service charges are high because you are providing an ‘all in’ solution for students. This is one of the reasons why the returns are so good on student accommodation investments even after the service charges are deducted.
Can I resell my property?
Yes, you can sell it at any time in exactly the same way as you would sell a residential flat. Assured amounts will be passed to new buyers. We are happy to resell student accommodation for investors and offer discounted fees on resale to anyone who buys new from us. Some investors prefer to buy second hand.
How would I go about selling a student property?
You can sell it via an estate agent or a specialist student investment company. The limited supply compared to demand means that there are few built and operational student accommodation investments for sale. For anyone who buys through us we will resell at a reduced fee.
Is it harder to sell than a residential apartment or house?
Demand for these properties currently outstrips supply more than residential property. Every newly constructed student development we have been involved in has sold out off plan. There are very few of this type of property on the market compared to residential property. About 3000 student rooms were sold in 2013 compared to around 1 million residential properties. Yes, demand is lower but so is supply. If we advertise on property portals, student accommodation performs similarly to residential in terms of the number of people who find it in searches and click through for more information despite us always advertising them as cash only. Buyers of student accommodation investments are less location specific due to its hands-free nature. When you are selling, you are competing in a niche market rather than with all other properties on the market. Some developers offer buybacks, they are often only a marketing tool and are usually weighted in the favour of the developer, they should be looked at in detail if it is the main reason for you choosing to purchase a development.
What is the difference between a studio and an en suite room?
En suite rooms are a room with a bathroom, they typically share kitchen facilities with between 6 and 9 other rooms. Studios have their own cooking facilities and bathroom.
Should I buy an en suite room or a studio?
There is little difference in terms of return, most of the institutional providers build en suite rooms but there is a growing market particularly among overseas students for studios. Recent research suggests that rental increases for studios have been marginally more than en suite rooms but it is very marginal. Studios are more expensive but get higher rents and longer tenancy terms, often 51 weeks rather than 44. Judge the return on each by development. A good agent will also be able to guide you on the supply and rents of each type in the local market.
Will student accommodation struggle in a market crash?
Student accommodation proved to be a strong investment in the last economic downturn despite it coinciding with the introduction of student fees. It didn’t suffer from a decrease in value as residential property did and didn’t suffer from lack of demand like retail or industrial property. The student market both for university applications and accommodation is oversupplied almost everywhere which leaves a lot of slack in a market downturn. EU students studying in the UK are a very small percentage of the total number so Brexit is unlikely to affect it greatly and the government has already officially announced that terms for EU students will, on the whole, remain as they are beyond Brexit.
Will I make more profit on student accommodation investment or on residential property?
There are too many factors to give a general answer on this, it depends on capital growth at the time. Student accommodation offers greater income and is less susceptible to market fluctuations but a residential property in a boom is likely to make more profit. It all depends on your attitude to risk.
How do students afford the rents, they seem high?
Most of the growth in the sector is in high quality student accommodation. As with the residential rental market there is demand from all types of students. There will still be many who are fixed on getting the best price but there are many others, particularly from overseas who are not comfortable in the traditional student digs and want something a little better. Mostly parents will fund this accommodation. Features such as high speed broadband are increasingly important for Skype and streaming, particularly among overseas students. Some of the developments we have sold include Cable TV with international channels. Also see fig 1.
Can my son or daughter live in it?
They can as long as they are in full time education but they will need to pay rent the same as anyone else. It is a question that is asked very occasionally and developers are generally not in need of the sales to a sufficient degree to make the ongoing management any more complicated than it needs to be. If you did go down the route of your son or daughter living in the unit and paying the rent for them check with your accountant that they are happy you won’t have to pay income tax on the money when you get it back again.
What type of university should I invest in?
Supply and demand is paramount as well as ensuring that the university is investing in its facilities and infrastructure. The big name universities are a big draw for many but they sometimes have a much greater supply of private accommodation already. In the last year or two many university towns and cities have started to prevent the conversion of residential property to student accommodation. In most cases you need to make a planning application rather than just applying for a license. In many cities the majority of these are turned down. Why? Because the local councils want to cut back on student ‘ghettos’ but also there is the realisation from local councils that they have lost a great deal of council tax revenue from their housing stock as students don’t pay council tax. In most UK university towns and cities private housing makes up over 50% of the student accommodation so the effects of this are significant.
Why are they always off plan?
Because they sell much faster than residential accommodation on the whole. No developer builds a development and then sell it if they know they can sell it off plan.
Will there always be a demand?
Due to the restrictions by local government in converting residential accommodation to student accommodation now and the government removing caps on student numbers, demand is greater than ever. Supply is increasing fast with the likes of Goldman Sachs, UBS and Legal and General investing heavily in student accommodation in recent years but increases in student numbers nationwide are still greater than the number of beds being built.
The answers to these FAQ’s are relevant to the majority of our developments but please check with us on specific sites.
For more information contact Broadgate on 0207 183 0726