Investing in student accommodation

Posted by Tom Walker in , ,

The student accommodation market yielded a return of 7.8 percent in 2013 and, according to Knight Frank, should offer similar returns in 2014. In an economy where savings rates are at pitifully low levels, what avenues are there for investors interested in investing in the higher-yielding alternative property investment class that is student accommodation?

Letting to the student species

Buying student property gives investors the most direct access to the market. Whilst this results in the new home-owner receiving the full benefit of any capital appreciation the property may experience in addition to the full yield generated by any tenancies (no fund managers taking a slice of the action), the investment approach also comes with additional risks and administrative burdens.

Firstly, there is the importance of location, as is the case with all houses. Property experts have warned of a divergence in the investment performance of student accommodation, with some towns forecast to perform better than others as a result of the government's decision to raise tuition fees. According to Savills' residential research, cities at the top of the list for investors include Bath, Brighton, Bristol, Cambridge, Cardiff, Edinburgh, London, Oxford and St Andrews, where strong university standings in UK and Global rankings coupled with favorable local market dynamics make for a safer bet. Investors should review location based on quality of institution, rather than city alone. For example, Birmingham has 5 higher education institutions, contributing to a large overall student community. However 2 of those 5 institutions are currently considered to be at risk of merger or closure.

Beyond regional performance in student accommodation, intra-city variances need careful consideration. Investors should research where campus is or where key lecture theatres are, in addition to the proximity of local public transport and whereabouts of student nightlife hot spots. Although the convenience factor of being close to lectures is important, social activities usually take precedence when it comes to a student's choice of location.

Taking on property ownership also exposes an investor to central government and local government policies, including HMO licensing, accreditation schemes and policies aimed at freeing up housing stock for families.

Finally, there is the issue of mortgages that need to be considered. Lending for the purposes of buy-to-let is typically more restrictive when students are the target tenants; some mortgage providers may even prohibit students from being tenants in properties they are providing finance for altogether. Further to this, mortgage providers typically become pickier when HMO licensing is required, with many put off by the notion.

Invest in a fund or company

This may be a more preferable option for those that either do not have the large upfront deposits required to enter into the buy-to-let market or simply do not have the time to spare on maintenance issues, associated administration or the yearly hustle to secure another tenancy. Although there is a relatively limited choice in the fund space, investors can choose from a small selection of student accommodation only funds. These offer indirect exposure to the market without large upfront sums and hassle. Funds include Brandeaux student accommodation fund, Mansion Student Accommodation fund, Victus Capital student accommodation fund (which offers exposure to European student accommodation market) and GCP Student Living (the first student accommodation REIT in the UK).

Alternatively, investors can invest in companies that specialize in the construction of student accommodation. UNITE UK Student Accommodation (who also runs a student accommodation fund) is a provider of UK student accommodation, offering 41,000 student bed spaces across 23 of the UK cities. Purchasing stocks or bonds in UNITE is another avenue for any investor eager to tap into the student accommodation market, however the construction element of UNITE's business does expose the investor to a broader set of risk parameters.

As always, seek professional financial advice before making any investment decisions!

Image courtesy of Flickr, Creative Commons.