5 risks for Student Property investors to avoid
All investments come with a degree of risk; if they didn’t, there’d be no reward.
But when it comes to Student Property there are 5 steps you can take to give you and your portfolio a better chance of success.
1. Consider the alternatives to buy-to-let
The residential property sector can be volatile, especially in times of economic uncertainty.
And with a housing shortfall of 1.8 million forecast by 2025 (RICS), both central and local government are doing their best to discourage the conversion of residential property into homes in multiple occupation (HMO).
There is a Stamp Duty surcharge on all secondary residential properties along with all the other conversion and refurbishment costs.
Depending where the house is, the local authority may invoke Article 4 legislation, which can require you to seek planning permission.
But if you do decide to go ahead, be prepared for the inconveniences and expenses of landlordship – being on call to solve tenants’ issues, unexpected repair/ replacement costs and void periods.
And certainly bear in mind that yields can often be a disappointing return on so much effort.
A stress-free alternative is Purpose Built Student Accommodation (PBSA), acknowledged by Knight Frank to be the best performing UK property asset of the last 5 years. Classed as commercial property, it is exempt from Stamp Duty below a purchase price of £150,000.
Onsite professional management teams allow for completely hands-off ownership.
In yet another year for record-breaking university admissions, demand for PBSA continues to grow.
But don’t settle for just any old student development.
2. Ensure your property gets built
Planning delays, costly overruns, shoddy build quality and non-delivery; all are potentially disastrous to the off-plan investor.
So choose your developer wisely; it will prove key to the quality and sustained appeal of your property.
As a relatively new sector, look for a developer with a proven track record in Student Property. Ask for evidence of successful past developments, and demand detailed background research and due diligence for your property.
An independent 10-year build warranty would be very desirable, as would regular project updates and an escorted site visit.
If the developer chooses to keep the freehold, that bodes well for the property’s overall build quality and long term maintenance.
3. Make sure you get what you were promised
However slick the presentation, all that glitters is not gold.
Whatever the advertising says, there’s no substitute for total transparency throughout the project.
You should be able to follow progress closely, and to ask any questions you like of anyone at any time. Be absolutely certain there are no catches in the small print, no extra costs in the future or questionable get-out clauses.
You should also have an agreed start date for your long term fixed NET income to go automatically into the account of your choice.
4. Look ahead to the end of your fixed income period
If you (and your developer) have done all your research at the outset, then you should be quite certain that your property is as appealing at the end of the term as it is today.
You will have started with location, and identified a popular, ambitious university with plans for expansion – but in a city which is significantly undersupplied with PBSA.
A recent report from CBRE suggests that 40% PBSA access represents saturation. With a national average of 24% access, look beyond the obvious regional hub cities where demand is already weakening; you’ll want students to be queuing up for a room many years hence.
Infrastructure is another consideration; good access to road and rail networks and, especially important for overseas students, international airports, is essential.
The UK’s 450,000 overseas students make a huge contribution to our national and local economies. Today, the fragile pound allows them to spend even more on premium accommodation and subsistence; plus, of course, many of them are looking for a year-round place to call their own.
Aligned interests also provide assurances for the future. This occurs when the developer chooses to rely on long-term rental growth to make a profit, and so retains the property’s freehold.
To make a profit this way, the developer has to deliver a build of the very highest quality, and then equip, furnish and maintain it to exacting standards. The appointment of an incentivised onsite management team works to achieve sustained asset appeal for both developer and buyer.
This is in stark contrast to other developers whose aim is to make their money as quickly as possible via shorter term, lower yields sold at inflated prices.
At the end of your fixed period, you may choose to extend it on mutually favourable terms or, because the property’s value is based on its yield, you may opt for capital growth by resale.
5. Know your exit options
Never commit to any property investment without being 100% certain that you can walk away from it without penalty or inconvenience.
It’s a fact of life that anybody’s circumstances can change in the blink of an eye; an asset is only an asset if it works in your favour. You need to know how easy or difficult it will be to dispose of your property if you ever need to.
For this reason, your contract should give you absolute liberty to resell any time you like after completion without let or hindrance.
Any property with a proven track record of income earning is attractive to a new buyer. Any yield above 7% is very tempting, and if it isn’t performance or cost related, it’s almost irresistible.
So do make sure that your fixed NET income period is fully transferable should you decide to sell; flexibility is key in this sought after sector.
In 2015, of the £5.9bn traded on the UK Student Property market, 80% was spent on operational units.
It’s also worth noting that as commercial property, PBSA is not subject to Capital Gains tax on resale.
As an owner in a relatively specialist sector, you may need guidance when it comes to selling on your property. A lot of the UK’s student accommodation is owned by overseas investors, so it will help to have access to this network of interested parties. An agent in the know should find you a buyer within 4-6 weeks.