The risks of investing in 'guaranteed' yield student halls

Posted by Matthew Heap in

The huge increase in investment into the student halls market place has brought a wave of new student hall projects across the country. Schemes are financed either by large corporate's, pension funds, builders or a shrewd business model that entices retail investors with guaranteed yields.

In a world with rock bottom interest rates, a "guaranteed" return of 8-10% is rare, but is there a catch? Well of course, yes. The initial product is a fantastic idea; crowd funding a student hall for as little as £40,000 per room whilst also alleviating the investor of the burden of advertising and managing the accommodation makes for a fantastic investment on paper. The student accommodation market, along side university admissions, are booming which is fuelling robust occupancy rates in many student halls.

Schemes such as the Spectrum Apartments in Sheffield allow an investor to purchase a student room for £55,995 with a guaranteed return of 8.9% for five years. RW Invest is offering rooms in London from £82,500 with a "10pc guaranteed income in year one and projected returns of around 9pc".

If you choose your scheme carefully and from a reputable firm, the numbers are indeed alluring, however as with any investment offering high returns, the risks are aligned proportionally. Many of the rooms are sold off-plan and in most cases for cash investments. As a result, a major risk requiring review is that the building never completes. You would be wise to review the default clause to mitigate any such risk relating to the construction of the accommodation.

Another non-trivial risk worth considering is management risk in which the contracted managing agent fails to meet the required occupancy rate. Again, it would be prudent to confirm that yields are distributed evenly, irrespective of which rooms are actually let in any given year. If returns are not distributed evenly across all investors, there is a risk that you receive no income if your room is one of the unlucky ones that lays vacant for the year.

A less obvious risk is the lack of liquidity should an investor want to liquidate their holding. The only options to exit the investment would be if the entire hall complex was sold or if another investor was found who wanted to purchase the room; however, each of these exit strategies are slow and cumbersome processes.

Cases of defaults are starting to occur. Last November, Liverpool-based Middle England Developments was put into administration by its owner, property developer Nigel Russell, with debts of £3m. The firm had sold individual bedrooms to investors for £50,000 with "guaranteed" returns that failed to materialise. Separately, FreshStart Living agreed to settle £131,000 in unpaid rent to 70 investors in May. It has since stopped selling student rooms to individual investors.

For individual investors, the option of investing in student accommodation via this avenue certainly provides increased exposure to the market. However, as featured in our article investing in student accommodation there are other methods for retail investors with more modest sums, including REITs such as Empiric Student Property and GCP, which provide strong returns and are backed by industry leading student accommodation firms.

Source Flickr, Creative Commons