© The Financial Times Ltd 2015 FT and 'Financial Times' are trademarks of The Financial Times Ltd.
September 4, 2010 12:45 am
Before soaring house prices ran into the recession, it was financially prudent for parents to buy property for college-bound offspring. In 2002 famously canny money-makers Tony and Cherie Blair bought a flat in Bristol for their student son, Euan, although he never moved in.
“You used to be pretty much certain of a profit after a couple of years,” says Mary Ryan of Property Vision. Reflecting the buoyant property investment market, the number of UK buy-to-let mortgages rose from 75,000 in 2000 to 1.2m in 2009.
Now, however, house-price uncertainty, new landlord-unfriendly legislation and rises in stamp duty and capital gains tax mean that gaining from student property is no longer such a certainty. People are still doing it, though. Earlier this year the most expensive one-bedroom flat ever sold in Cambridge went to parents buying for a student for £305,000.
But does it still make sense? Straight-forward capital gain on the property’s value is only one potential financial reward when buying a student pad. Housemates pay rent and there can be tax advantages. “If the child owns the house and receives rent, he or she is likely to pay less income tax than parents,” explains Arabella Saker, a partner at law firm Maurice Turnor Gardner LLP. “In addition, the Rent-a-Room Scheme means that up to £4,250 rent is tax-free if it is the landlord’s main residence.”
Student rent is 22 per cent higher now than in 2006-2007, according to a March 2010 NUS/Unipol survey. So your child can save paying rent, rake it in from tenants and learn financial management to boot. With your child in situ, you have a resident landlord. Whether that’s an advantage or not depends on the child.
Capital gain on flats has been weakened by the top rate of CGT’s rise to 28 per cent but this levy can be avoided to a degree in student-owned digs. “If the child has little or no other income, the first £10,100 capital gain is tax-free; and if annual income totals less than £43,875, the child will be taxed at only 18 per cent on the rest,” Saker says. A student-owned house can also work for inheritance tax planning (avoiding death duties). Owning a house does mean your child could sell up, drop out and reinvest the proceeds in a life of debauchery but this can be avoided by lending your child the deposit or purchase price. “The child will keep the growth but won’t have an immediately valuable asset,” Saker says.
David Adams, head of residential at estate agency Chesterton Humberts, says that for foreign students, buying a property is “also about a currency hedge and having part of their property portfolio invested in sterling, currently good value for those investing with dollar-backed currencies, like the Chinese”.
As well as financial gain, there’s security and kudos for the student. Do you want your little darling living God-knows-where, under the boot of an unscrupulous landlord, or in a delightful mews house in a lovely part of town? Living in a genteel borough while potential friends are gallivanting round halls on the far side of town might, however, mean social death for them in their first year. After halls, students, particularly male ones, might prefer to share a trashable house with 10 mates.
Dominic Parr, of student landlord company Parr Houses, says: “There are more pitfalls [to owning student housing] than you’d think. Professional landlords have the edge over private buyers. We have better relations with estate agents and we know where to buy. An estate agent will not lie but he may not mention that your house is just a little too far from the main uni area, so it won’t suit your child and you’ll have trouble selling it. A lot of people have fallen into that trap.”
Parr says new laws favour the tenant (and therefore are unfavourable to the landlord) and that legislation intended to stop the spread of student housing hampers the private landlord: “A new law came in this April. For HMOs (houses of multiple occupancy) containing three or more unrelated students, if the house has no history of letting, you must apply for planning permission, which you may not get.” This might leave you unable to rent your new purchase and liable to huge fines if you do. Again, Parr warns, estate agents might not mention this.
Parr also wonders whether you want your child mixing business with the pleasure of university. Friends made at university tend to be friends for life. Will your offspring enjoy taking their best mate to court over a rental dispute?
So the student flat market it not the golden goose it used to be. Nonetheless, a major trend is an increase in overseas, particularly Asian, buyers. The record-breaking one-bedroom flat in Cambridge was sold this year by Savills to Malaysian parents. This month the agency will begin targeting east Asian buyers with a 200-flat development in the city. In Singapore between February and March United House Developments sold 51 of 56 new-build flats in Covent Garden, central London, with 20 of the 51 bought by parents for student children.
The reason for the Asian influx is twofold. First, as Liam Bailey, head of residential research at Knight Frank, says: “Despite prices rising by 22 per cent in the 14 months up to the end of May 2010, currency movements mean that effective prices in central London were still 32 per cent lower than their peak in March 2008 for a purchaser in Hong Kong dollars. Singaporean and Malaysian buyers can expect similar savings.”
Asian investors are now buying more than one-fifth of all central London new-build properties. Knight Frank figures indicate that from March 2009 to March 2010, Asians purchased 49 per cent of all investment properties in central London.
The second reason is the increase in numbers of Asian students. The UK has good universities. According to Times Higher Education’s 2009 rankings, England has four of the six best in the world. So global attraction is high. There are 210,000 non-European Union overseas full-time students in UK universities, according to recent Savills research, while Knight Frank reports that the strongest growth comes from China – the number of Chinese studying in the UK rose from 4,017 in 1998/1999 to 47,035 in 2008/2009 – India and Pakistan.
Asian investors tend to buy high-end and long-term. Adams says: “Overseas parents are interested in terraced houses or large apartments in central London or well-known suburbs, rather than near universities.” Says Bailey: “Asian investors often look to retain a property as an investment.” This might be as a monetary investment or as a UK pied-à-terre for the family. As a result, the quality of many student flats has increased.
So should you buy a flat for your student child? The answer, annoyingly, is yes and no. Parr advises against. “Why meddle in a field you don’t know? There won’t be any capital gain for a very long time.” Others are more positive, if cautious. Independent mortgage adviser Dave Townsend says: “Buying your child a university flat is still a good idea but people need be more canny. For example, in Bristol, move outwards from campus, from Clifton and Redland to Staple Hill and Downend.”
The problem is that Staple Hill and Downend are about seven miles from the centre of Bristol University’s academic and social life (in Clifton and Redland). Students probably won’t enjoy Staple Hill. Even impoverished 1980s fictional Bristol students The Young Ones lived in Redland.
“You should avoid areas where ‘studentification’ has taken place,” says Sue Laming of Savills, as it will be tricky to sell afterwards. This is difficult if you’re looking for a place where students might want to live, with the possible exception of London, and towns such as Cambridge, Oxford and Edinburgh, where “intelligent” industries mean that workers live alongside students.
So, financially, it’s probably only worth buying a flat for your student child if you are going use it beyond the standard two-year period (three-year degree minus first year. A student who wants friends should spend the first year in halls).
If not, it is probably better to rent, then buy your child a house once they are working. The Blairs have just helped Euan buy a £1.3m house in central London. It is likely that their son, who works in London, will be more grateful for this than for the Bristol flat that he never lived in.
United House Developments, www.unitedhousedevelopments.net, tel: +44 (0)1322 665522
Maurice Turnor Gardner LLP, www.mauriceturnorgardner.com, tel: +44 (0)20 7012 8610
Property Vision, www.propertyvision.com, tel: +44 (0)20 7823 8388
Omnis Financial Solutions, www.omnisfs.com, tel: +44 (0)117 9675052
Knight Frank, www.knightfrank.co.uk, tel: +44 (0)20 7629 8171
Chesterton Humberts, www.chestertonhumberts.com, tel: +44 (0) 0203 040 8240
Parr Houses Student Accommodation (in Nottingham and Loughborough), www.parrhouses.com, tel: +44 (0)1509 238838
Copyright The Financial Times Limited 2015. You may share using our article tools.
Please don't cut articles from FT.com and redistribute by email or post to the web.