Alternatives: Student property: What’s the catch?

Student property provides strong annual returns but it is a medium- to long-term investment

Luke Jackson 700

The student property asset class has become very popular over the past few years. The sector’s physical store of wealth, its inflation hedge and the fact it can provide regular rental income and diversification from mainstream investments have made it enticing and there has been unprecedented growth in the number of opportunities for retail investors.

Over the past decade, the UK demand for purpose-built student accommodation has greatly increased, driven by rising student numbers – particularly international students. Total university acceptances increased by 40 per cent from 2004 to 2013, with international students rising by 56 per cent over the same period. Add to this the lack of university-owned accommodation (just 26 per cent of students in the average university town live in halls of residence, according to the Knight Frank Student Property Index) and you have a great case for building student properties.

Supply has taken time to catch up with demand and many students have turned to renting private houses. But this is having a negative impact, with local councils seeing a dramatic fall in revenues because full-time students are exempt from council tax. In addition, today’s students demand higher-quality accommodation, more flexible tenancy options, rent inclusive of bills and a social living environment, which are not always available when renting privately.

So what are the main benefits to investors?

Annual returns: Students are willing to pay more for premium living. Knight Frank found students willing to pay 20 to 75 per cent more for PBSA than for a private property in several UK locations. This has helped returns from student property to outperform all other property sectors since 2011, with Knight Frank recording total returns for the year to September 2013 of 7.8 per cent.

Inflation hedge: Total returns have been above the rate of inflation for several years. Annual rents are usually linked to inflation and are set each year, providing an effective hedge for investors. There is the added benefit of capital growth in the property.

Diversification: Historical returns have had a low correlation to mainstream investments. Despite student property being a relatively new asset class, it provides good diversification as a physical long-term store of wealth as part of a balanced portfolio.

So what considerations should investors factor in?

Location: University cities have varying factors affecting supply and demand. The local area is important as students value their safety and prefer to be close to the university, transport, shops, restaurants and bars.

University ranking: The UK has six of the world’s top 20 universities (2013 QS World University rankings) with higher-ranking universities often attracting a lot of international students. Properties located in top-ranking university cities will benefit from strong student demand for many years.

Management company: Student properties must adhere to several regulations. This requires an experienced management company to create a “brand” for the property to attract students and maintain high occupancy levels as well as undertake maintenance, collect rent and deal with day-to-day issues.

Liquidity: Student property is an illiquid asset which takes time to buy and sell and involves high transaction costs. It should be deemed a medium- to long-term investment.

Exit strategy: This is the main consideration for investors. Despite the many properties available, there is not yet an established secondary market for PBSA. Also, banks are unwilling to lend against PBSA, which limits the depth of the resale market.

So how do you get access to the sector? There are established mainstream opport-unities, including a number of collective investment schemes which aim to provide liquidity and low minimum investments and transaction costs. But any investment that holds underlying physical property can suffer liquidity issues, regardless of performance.

Directly held student properties include the purchase of a “student pod” in purpose-built halls of residence. These investments start at £50,000. Providers offer rental guarantees at a fixed percentage of the purchase price for up to 10 years, making these investments very attractive. But with so many properties appearing in such a short time, there is the risk of oversupply in some cities.

Student property is attractive for investors seeking strong annual returns. It provides diversification and a store of wealth over the medium to long term.