Student buy-to-let: assessing the risk-reward ratio
For the buy-to-let landlord with no plans to make any more purchases and with no mortgage to repay, the recent increase in stamp duty and tapering of mortgage interest relief will have had no effect on income. In fact, the measures may have been helpful in some ways because landlords might be inclined to push rents higher to recoup some of the income lost. And a ban on letting agents charging tenants fees suggests that further costs are coming the way of landlords.
For prospective entrants, this may all just be too much, with lower yields not justifying the work involved. So recently other investment avenues have started appearing. One of the most attractive sub-sectors of the property market is student accommodation, with brand-new purpose-built apartments now available, offering a safe and enclosed working and living environment with a host of facilities on site. This is especially attractive for overseas students, who may feel vulnerable in a new and strange city.
There are currently 1.8m students in the UK, but only 550,000 live in purpose-built accommodation or on a university campus. And demand means that rent increases can be pushed through each year, having grown at an average 3.5 per cent a year. The UK is also a highly sought-after place to study – in 2016 a record 725,000 applicants were chasing 540,000 places.
Property developers are now using agents to promote the sale of these apartments to private investors, and the attraction is the size of the rental yield and, in some cases, an element of capital appreciation. Studio apartments are available for as little as £58,000, but you may be liable to pay extra stamp duty.
Some schemes will be offering rental yields of around 9 per cent, after deducting a fee charged by the rental manager who works to ensure that the property has a student tenant. This yield is also after a service charge and ground rent have been deducted. Too good to be true? Well the arithmetic certainly stacks up. If a student pays £150 a week (or rather, Mum and Dad do), that’s over £7,500 a year, which on a purchase price of £58,000 gives a gross yield of around 13 per cent, leaving plenty for you, the investor, and the managing agent.
The UK is a highly sought-after place to study – in 2016 a record 725,000 applicants were chasing 540,000 places”
In a typical transaction, a purchase will be made off-plan, with a non-refundable deposit required upfront. You must also be comfortable with handing over your money – as much as half the purchase price on exchange of contracts, and the balance on completion. The risk is that something might go wrong before completion, although buying off-plan also locks you in to a fixed purchase price, and the value of the property may well have risen by completion. If you feel that property values are going to fall, you might want to consider the consequences of paying for a property that could be worth less on completion than you paid.
So where does the risk factor come in? If the developer gets into financial hot water you can probably say goodbye to your deposit, so run some sort of health check over the developer. There is also a risk of depleted rental income as a result of voids. At the moment, this is less than likely because there is a considerable imbalance between supply and demand, although that would narrow as more accommodation is built or if student numbers declined.
For less return but with less risk attached, you might want to buy shares in a company that specialises in student accommodation, such as Unite (UTG). The forward yield is nearer 4 per cent, but the risks are that much lower. However, if you’re set on buying an off-plan studio flat, it’s vital to engage the services of a solicitor who specialises in this type of work. It’s also down to you to assess the suitability of the properties on offer, and to make your own financial and legal assessment.
Another big question is, can I sell my property? This depends on each individual scheme, but taking a typical example, Darwood Jones Property Investment pointed out that there would be restrictions on selling a property on to the open market, but there is no reason why the property can’t be sold to another buy-to-let student accommodation investor.
Like any other investment opportunity, it pays to do your own homework. The potential return is attractive; you just have to establish whether this is the sort of investment for you.