Investors in student property advised to do homework

Student accommodation has become an increasingly popular asset class in recent years, as investors and parents have been attracted by the high yields and reliable returns on offer. But not all investment locations will continue to perform as well in the future, experts have warned.

Investors in student properties have benefited from the imbalance between the supply of accommodation and the high demand for university places in the UK. According to the Knight Frank Student Accommodation Index, total returns for student property across England and Wales were 13.5 per cent in the year to December 2010, and 8.41 per cent in London. Average yields were 6.25 per cent a year.

“For many years, letting to students has been deemed attractive for investors and parents alike,” says Jonathan Hopper of Garrington, the property firm. “Investors are drawn by higher yields, ‘joint and several liability’ leases [which make each tenant individually responsible for all the rent and damages] and – in many cases – personal guarantees by parents. Combined, they provide for a stronger high-performing investment.”

However, property experts have warned of a growing divergence in the investment performance of student accommodation – with some university towns forecast to perform better than others, as a result of the government’s reform of university funding in 2012.

Savills, the property agent, believes the changes will lead to a market where there are distinct winners and losers, making it essential that investors research locations more carefully than before.

“It is hugely important for developers, investors and funders in the student housing sector to understand that there are some towns and cities that now present a high risk and are likely to significantly underperform in the future,” says Yolande Barnes of Savills.

Its research of 114 universities in England (see map) shows that there are a number of university towns that will continue to provide attractive returns, such as Exeter, Brighton, Manchester and London. These are still rated as “buy” locations. But it has also identified ten universities towns where demand will weaken, due to a combination of funding reform and the inability to attract full-time and foreign students.

Marcus Roberts, head of student investment at Savills, says the Russell Group of the top 20 UK universities – which include Oxford, Cambridge, Bristol and Imperial College London – is a good place to start when selecting a property, although he says this is not a “catch all list”.

“When choosing an investment location, it’s important to look at the mix of courses offered,” Roberts advises. “I’d recommend focusing on universities that offer a high proportion of science, technology, engineering and maths courses where government investment is expected to be concentrated.”

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 provide the top investment locations, as they continue to boost their global standing.

Roberts says it is important that investors do not choose a property location on student numbers alone. “In the past, investors have tended to consider the strength of a market at a city level, rather than at the institution level,” he warns. “Given the changes taking place at present, there are a number of universities that are considered at risk of closure or merger.” For example, in Birmingham, two of the five institutions are considered at risk, he says.

Darina Kerr, partner in the real estate team at law firm Dundas & Wilson, agrees. She says that while student property is seen as a safe bet by some investors, the sector is not without risk. She points out that, as the number of mergers increases, some institutions may close down surplus teaching facilities, decreasing demand for on-campus student accommodation.

Rental demand can also be affected by the growing trend for more students to live at home and commute for economic reasons – a trend that is expected to accelerate with the raising of tuition fees.

Research from LV= found that the number of stay-at-home students is set to more than double by the year 2020, to reach 793,000 – which represents 47 per cent of all UK higher-education students.

However, some agents claim the impact on property rental yields will not be significant. “Recent speculation of a fall in demand for student accommodation looks like a natural knee-jerk response to the rise in student tuition fees,” says Hopper. “But, given that official statistics suggest a supply/demand imbalance of between 150,000 and 200,000 university places, it’s unlikely to have a profoundly adverse affect on the dynamic of the market.”

Ray Withers of Property Frontiers, the investment firm, takes an equally bullish view. “The fact remains that more and more people from both home and overseas are seeking to attend university in the UK, placing increasing pressure on both the number of places available and student housing stock.”

Agents anticipate that these changes are unlikely to deter parents from buying property for their children to live in at university. Many better-off parents now consider this route, to avoid paying high rents and to provide their children with safer and better quality accommodation.

For parents of children studying in London, this remains a popular option. Garrington reports that, in the first six months of the year, 20 per cent of its clients were acquiring property in London for student letting purposes. Hamptons International has seen parents buying for their children in Chelsea, due to its proximity to Imperial, UCL and Kings College, and Earls Court, which offers better value for money.

“We’ve recently agreed a sale of a studio apartment in Nevern Square, Earls Court, to a couple for their son to use while at university,” says Jeremy Creasor of Hamptons. “They were attracted to both the resale investment value and impressive potential rental yields in the future.”

Nevertheless, parents and investors still need to do their sums. David Hollingworth of mortgage broker London & Country says parents need to consider how long they might keep the property. If they are buying it only for the tenure of the child’s university term, then entry and exit costs will eat into any savings made on rental costs. “There’s clearly no guarantee that they will be offset by capital appreciation,” says Hollingworth.

Mortgage availability for student lets is another factor. Melanie Bien of Private Finance says not all lenders will allow students as tenants – or allow the offspring of the investor to live in the property. Woolwich and Paragon are among the more flexible lenders for student housing, she notes.

“There may be restrictions among those lenders who will consider student lets, with the lender insisting on only one assured shorthold tenancy agreement per property, rather than individual contracts for each student,” explains Bien. “Other lenders will only allow a maximum of four or even three students in the property – so those six-bedroom properties so common in many university towns would not be suitable.”