Last updated: February 3, 2014 3:06 pm

How to invest in student property

06/02/07. PETER BROOK, A 21 YEAR OLD STUDENT PHOTOGRAPHED AT HIS 'DIGS' IN GUILFORD, SURREY TODAY (FOR FT MONEY MAVERICK). CREDIT: DANIEL LYNCH. 07941 594 556.©Daniel Lynch

A 21 YEAR OLD STUDENT PHOTOGRAPHED AT HIS 'DIGS' IN GUILFORD,

Student housing has become an increasingly popular investment in recent years. The sector has ballooned from a fringe investment 10 years ago to being a global market worth $200bn today. Growth has been underpinned by a rise in the number of students worldwide – up from 98m in 2000 to 165m in 2011.

Private and institutional investors have been attracted to student property as an asset class due to the relatively high yields on offer, which look set to continue in the foreseeable future. Knight Frank, the high-end estate agent, recorded annual returns of 7.8 per cent in September 2013 and predicts similar returns in 2014.

“Student property is one of the most successful real estate asset classes, thanks to stability of demand for student bedrooms from all over the UK. The market is still structurally undersupplied in all core university cities,” says James Pullan, head of Knight Frank Student Accommodation.

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Buy a student property

The most direct way to gain exposure is to buy a property and let it out to students. Many investors are attracted by higher yields, “joint and several liability” leases – which make each tenant individually responsible for all the rent and damages – and personal guarantees by parents.

But, as with any buy-to-let investment, it is essential to choose your location carefully. This has become even more important following the government’s reform of university funding in 2012.

Investors should focus attention on universities experiencing increasing or stable demand. A good place to start is the Russell Group of 24 leading UK universities, such as Oxford, Cambridge, Edinburgh and Imperial College London.

Russell Group of leading UK universities

University of Birmingham

University of Bristol

University of Cambridge

Cardiff University

Durham University

University of Edinburgh

University of Exeter

University of Glasgow

Imperial College London

King’s College London

University of Leeds

University of Liverpool

London School of Economics & Political Science

University of Manchester

Newcastle University

University of Nottingham

University of Oxford

Queen Mary University of London

Queen’s University Belfast

University of Sheffield

University of Southampton

University College London

University of Warwick

University of York

Another useful metric is the proportion of non-EU students that a university has. Property agents say that universities that prove successful in recruiting overseas students will be the top investment locations, as they continue to boost their global standing.

It is worth considering what type of student property to buy – flat or terrace house – and whether you need a House in Multiple Occupation (HMO) licence. HMOs are private houses rented to at least three tenants who form separate households. However, councils are now making it more difficult, and expensive, for investors to offer this type of property.

While student property has performed well in recent years, there is no guarantee this will continue. Rental income is not guaranteed and yields can vary. Make sure you do your research when choosing which location to buy.

www.savills.co.uk

www.knightfrank.co.uk

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Check your mortgage options

Mortgage availability for student lets tends to be more limited than other buy-to-let mortgages. Not all lenders allow students as tenants or allow the offspring of the investor to live in the property.

Abbey, Aldermore, Leeds Building Society, Paragon Mortgages and Woolwich will lend on properties for student lets. However, these lenders usually expect that there is no requirement for HMO licensing and no modifications to the property.

Fewer lenders will provide loans for HMOs. The Mortgage Works caters for smaller HMOs of up to five tenants, but landlords need a deposit – or equity – of 35 per cent or more to access its mortgage range. Keystone Mortgages will lend on properties with up to eight tenants.

For larger HMOs, Paragon Mortgages provides finance for properties containing up to 20 units, with a maximum loan-to-value of 75 per cent.

www.mortgagesforbusiness.co.uk

www.landlordcentre.co.uk

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Invest in a fund

This may be a better option for investors without the large upfront sums needed to buy a student property directly. While the choice is not extensive, there are a few student property funds open to private investors.

Student property funds open to private investors include the first UK student accommodation real estate investment trust, GCP Student Living. Its stock market ticker is, appropriately, DIGS.

www.gcpuk.com/gcp-student-living-plc/gcp-student-living-plc

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Invest in a developer

Private investors can also gain direct exposure to companies that develop student housing. Unite Group is the UK’s largest student housing provider by volume and one of a handful of publicly listed student housing providers.

Find a mortgage adviser

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The group has low vacancy rates and steady, inflation-linked income.

Buying shares in Unite is not the only option. In 2012 it launched a retail bond on the London Stock Exchange’s retail bond platform, paying 6.125 per cent a year for seven and a half years.

However, Mick Gilligan of Killik & Co, the advisory firm, noted that Unite is more exposed to the higher risk development end of the market and has a lower yield than GCP Student Living.

Investing in property is not risk-free. Illiquidity can be an issue when investing through a fund. Make sure you seek financial advice before you invest.

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