Purpose-built student accommodation (PBSA) is one of the most exciting areas in the UK property market. £3.1bn worth of PBSA was sold in 2016, double the value of only three years before.
Regularly offering returns of 8-9%, this is an area that keeps providing rich rewards.
So what is PBSA all about?
Investing in Students
Almost half of young people in the UK go to university.
Many overseas students also make use of a university system that was ranked second in the world in 2016.
That means a lot of students looking for somewhere to live.
The expectations of modern students are different from 30 years ago.
They’re less willing to accept run-down shared houses, preferring en-suite apartments. 20% of them are willing to pay more than £160 a week in rent to ensure quality accommodation.
Though freshers often live in university property, 70% of students live in privately- rented accommodation.
A growing proportion of this accommodation comes in the form of purpose-built student-only apartments, with facilities that can include shared gyms, study areas, and recreational facilities.
Local councils, keen to free up other accommodation and so tackle housing shortages, are making it easier for developers to build these blocks.
This has created a large market for property investors.
The most obvious advantage of investing in PBSA is the certainty that someone will want to rent the property.
With 1.7m full-time students in the country, and that figure growing year-on-year since 2012, there’s a huge pool of tenants.
Tenancies are also relatively stable.
Students usually sign up for 48 weeks to a year, and new tenants appear on a regular annual cycle. Property is unlikely to be left empty.
PBSA has certain advantages over investing in other student rental properties.
Economies of scale increase the profitability of the investment and allow onsite management.
This relieves the investor of the burden of dealing with the property and its tenants, including chasing up rent and dealing with repairs.
Because they’re purpose-built for students, these properties are often built in locations that appeal strongly to them. Close to campuses and town centres, they’re convenient for their target tenants.
For a relatively small-scale investor, one of the challenges is finance.
Mortgage lenders are unlikely to advance the funds for this sort of property, and so it normally has to be cash funded.
Long-term value is another concern. Part of the reason rental yields are so good on new accommodation is that it is in perfect condition. It won’t take long for that to wear off, potentially affecting rental prices.
And with this accommodation purpose-built for students, the only people you can sell it on to are other investors interested in the student market, limiting your options when you want to get out. Connected to this is the value of the property.
While the rental returns are high, the overall value isn’t likely to increase as much as ordinary residential property. The advantage of such a property depends on a balance of short and long-term gains.
While gross returns on these properties may look promising, you need to be careful about whether you’ll actually receive the expected return.
Finding new tenants and managing the existing ones both incur costs. A poorly-run PBSA may not be as promising as it appears.
In short, do your research. Make sure that the property is being run by a reputable developer who can provide the promised returns and that the property is in the right location.
Make sure that what they’re offering makes the most of the market.
And make sure they carry out necessary ongoing repairs to ensure the accommodation remains attractive to prospective tenants.
Likely Growth Areas
The best places to invest in PBSA have so far been the cities whose universities have a strong international reputation – places like London, Manchester, and Edinburgh.
Some of these still have great potential, but as they become saturated with student accommodation, the potential for profit drops.
Liverpool now has 21,700 PBSA units – one for every 2.1 students – and dropped out of the top ten of Savills’ annual Spotlight on UK Student Housing.
The best bet now is to look at under-served university towns with potential for growth.
Sheffield, Newcastle, Bath, Canterbury, Reading and Cardiff are all emerging as strong contenders.
Huddersfield has seen investment in student services, including £74m to regenerate of Kirklees College’s Waterfront Campus, while the university only provides 11% of students’ housing needs.
Other regional cities such as Leicester and Bradford are in a similar position.
With less prestigious universities, these cities didn’t draw attention early in the development of this market. Many only have purpose-built accommodation for 20% of the potential market, as opposed to 49% in Liverpool.
Purpose-built student accommodation can provide a high yield for a property investment.
To make the most of it, invest in a well-run development in an under-served town, where there are plenty of tenants looking for the quality properties.
The students will keep flowing and, with the right investment and management approach, so will your profits.