Investors are overcoming the traditional stereotype of students and looking to increase their potential rental yields, student lets are now proving themselves to be a profitable Buy to Let opportunity. Here we intend to explain this investment option and outline the main points of this type of property investment, and why there is an increase in popularity.
The types of student accommodation to invest in:
Private halls of residence
These are purpose built, usually, cluster apartments with shared facilities such as kitchens and possibly bathrooms. En suite rooms are usually favoured by most students. These are the luxury end of student accommodation and normally house students with a higher budget such as international students. These are usually managed on-site, providing a hassle free investment.
Converted residential houses
Traditionally these comprise houses with 3 or more bedrooms that students will share. It is normal in a house with two reception rooms that the second room will be converted into another bedroom to increase rental income.
Private flat or apartment in a residential block
Being single occupancy, private single use units tend to attract higher rents, appealing more to post graduates and overseas students. (Statistically overseas students have a higher accommodation spend during the course of their education).
Why invest in student property?
Student Buy to Lets have become increasingly popular due to the high rental profit that can be achieved if the right type of property is chosen to invest in. According to a report published by Knight Frank, they stated there was a rental growth of "5% per annum over the last six years, compared to 0.6% for commercial property."
Over the last few years there has been an increase in university students in the UK, UCAS, (The Universities an College Admissions Service) they have reported that a record "481,854 students were given places to start in September (2010), an increase of 5.5% on the year before."
More people are attending university because of the economic climate; high unemployment levels increase university attendance, and levels are expected to continue rising as they did in the last UK economic downturn. Demand is set to increase in the years to come; figures show student numbers are set to increase to 3 million by 2014.
There is high demand for university accommodation due to the increase in attendance because the universities can only cater for a limited amount of students through their own subsidised university accommodation. With university budgets being constantly stretched by the increase of students they are more likely to use funds for educational purposes rather than accommodation, so student Buy to Let investments are looking increasingly attractive.
There are 168 universities and higher education colleges in the UK so there will be many locations to choose to invest, although not all of these locations will be equally profitable, variations in property purchase prices and rental incomes will affect the income accrued from a student let. Other points to consider when deciding on an area to invest in student property are; the drop out rates and the amount of accommodation already in the area.
Government funding is also a major issue, with university funds being cut by some 6% (449 million GBP) in the next academic year, (with potentially further cuts to be announced in October) subsidised student housing will come under serious pressure.
Student accommodation usually has very positive occupancy rates because they are let for most of the year. Due to the lack of property available to students, and the way that students plan in advance with respect to accommodation, investors also know well in advance whether or not their property will be let for the following year.
Traditionally housing lists are published to students in December or January, 7-8 months before they will plan to move into the property, so they can reserve the property that they want to live in the following academic year.
There is increased stability when letting to students as they will usually stay for the whole academic year. Security can be increased by asking the students to place their parents as guarantors, they will be more likely to pay their rent on time and if they don't, you (or your rental management company) then have the right to ask for the money from their parents.
Student lets are the only sector to see a rise in rental prices in the last few years, whereas residential lets have either remained stable or fallen. According to research, rents for student property have increased 19% over the past five years. Yields from student HMO property are typically higher than any other residential let, because properties are let on a per room basis.
A recent survey conducted by the NUS (National Union of Students) and Unipol Student Homes, a student housing charity, revealed student accommodation prices have risen by 22% since 2006-07. The average weekly rent for students was found to be 98.99 GBP, with the lowest rent in Northern Ireland at 68 GBP p/w and the highest in London at 151 GBP p/w.
Considerations to take into account:
With more adults in a property there is bound to be more wear and tear so there may be a need for more regular maintenance than if it is let to a family. The investor will also need to check with their mortgage lender about any restrictions they may have on the type of tenant they allow; some mortgage companies frown on letting to students and there may be ramifications to the investor if this is not researched.
There have been changes to the definition of HMO's in the UK (excluding Wales), (Houses of Multiple Occupation) the Planning and Use Classes Order has been amended to redefine HMO's to make the regulation clearer and more supervised by authorities. The property will need to be assessed by the local authority and licensed if there are more than 3 individual households living together. The changes, effective from April 2010, will mean that any property that does not conform to the HMO regulations may face a fine of up to 20,000 GBP. The extra costs in requiring a licence will likely be passed down to the tenant in the form of an increase in rent. Regardless of where your HMO property might be, it is advised to check thoroughly with local authorities with respect to planning laws.
In order to remain competitive the investor will need to make the property more attractive to students to increase rental prices (as with any buy to let). For example provide wi-fi, well equipped kitchens and well furnished rooms. The property will increase the quality of student which will decrease the risk of damage to the property and its contents.
With any Buy to Let investment, the factors that drive rental income up are location, quality and demand. The universities themselves are the best place to start looking for information because the accommodation office should provide a potential investor with the information they need. The decision to let to students does not change much of the Buy to Let investment structure, apart from the rental potential with HMO's is more likely to be higher than in a regular property.
- Friday 09 July 2010