Landlords, Be Aware of the Risks of Investing in Student Accommodation

Student accommodation in the UK is a booming market, according to estate agent Savills. However, landlords are being warned to be aware of the risks involved in investing in this type of property.

Savills reports that £5.8 billion was invested into the student accommodation market last year, with private developments springing up in prime city centre locations.

These blocks of high-spec, boutique rooms, complete with en-suites and flat-screen TVs, promise the student a luxury experience.

Landlords, Be Aware of the Risks of Investing in Student Accommodation

Since 2006, the private sector has gone from providing 18% of rooms to a huge 41%. On top of this, the latest NUS-Unipol survey found that the average weekly rent for student accommodation in the UK now stands at £147 – up by 18% on 2012-13.

Student numbers are also expected to rise for the foreseeable future, thanks to George Osborne lifting the cap on how many students each university can take. A recent study by UCAS shows a 0.2% increase in applicants for 2016-17, in part due to a 6% rise in students from EU countries.

While demand and prices may remain high, a leading student property investment specialist, The Mistoria Group, is warning of the pitfalls associated with letting student rooms.

The firm’s Managing Director, Mish Liyanage, insists: “If investors are considering student rooms, otherwise known as student pods, they need to look at not only the opportunity, but also the risks too.

“Unfortunately, a major disadvantage of student pods is their resale value and capital growth potential. The value of property will fluctuate with the market and the pool of potential investors is much smaller than for other types of student accommodation, such as HMOs [Houses in Multiple Occupation] and flats.”

Liyanage continues: “With a normal buy-to-let, you can sell the property at any time on the open market through a reputable estate agent, and expect a reasonable capital appreciation. However, selling a student pod will encounter problems. For example, who decides the market value? As a piece of real estate per square metre, it is very expensive (double the average market value), there is no established resale market. Who will sell it? Is it an investment or is it a piece of real estate?

“There is also the issue of guaranteed returns of 7%. The guarantees are only as good as the person or firm that is promising it. Investors need to weigh up whether they think providers of student pods are robust enough to stand behind the guarantee. They also need to be aware that the 7% guarantee may not stand in five years’ time, when their investment could have devalued as new developments have been released.”

He adds: “However, despite the big pitfalls of student pods, student property is a very profitable asset class giving robust returns. For example, in the North West, a high quality HMO, which will house four students, can be purchased for £160,000. The return on investment is very attractive too, with 13% (8% cash rental and 5% capital growth). Unlike student pods, you can apply for a remortgage and there is a buoyant market for this type of student property. If you are building a portfolio, you can lend on your equity in the HMO to fund further investments.”

If you are considering an investment in the student accommodation sector, remember to fully evaluate the risks involved with this market.