A beginner's guide to buying purpose-built student property

Type 'invest in student property now' into Google, and the first search result promises "Assured 35% Net Returns". The second reads "UK Student Investment - Invest from £59,950. 8%+ returns".

With such attention-grabbing rates being bandied about, it's no wonder that investor money is pouring into the sector. In the first five months of 2015, there was £4.2 billion worth of transactions, according to figures from real estate company Savills – a 70% increase on the entire 2014 figure, and 40% higher than the previous peak for student property in 2012. So student accommodation is hot property in 2015.

While there are several ways for private investors to get in on the action – such as buying shares in developers or putting cash into funds doing the same – one alternative is to invest directly in purpose-built student accommodation. This can be done by purchasing an individual 'unit' - usually a studio flat within a development that also includes communal facilities such as laundries, gyms and lounges.

Such developments tend to come fully managed, meaning the responsibility for the running of the student let – such as finding tenants, sorting out the rental paperwork and maintenance - is taken away from the landlord and handled by the management company you invest with.

In return for a lump sum investment - from around £60,000 depending on location – you will receive regular income, usually in the form of an annual return. For example, Knight Knox, a leading company operating in this area of the student property market, recently sought investment in a development in Sheffield due for completion in September.

For £69,995, investors were invited to buy one of 178 "large, contemporary student apartments" in New Bank House on a leasehold basis. In the marketing material on the company's website, the investment summary promised 8% net rental yields assured for two years – the block sold out.

The returns sound attractive – especially considering the same sum tucked in a competitive fixed-term savings account would only earn interest of around 3%, according to the comparison tables at Moneywise.co.uk/compare.

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What you need to consider

But before you jump in, there's a lot you need to consider. The first point to bear in mind is that mainstream buy-to-let mortgage lenders don't lend against this type of rental property, meaning you will have to buy with cash.

"It means this type of investment is risky," says Tom Entwistle, director of information portal LandlordZONE.

"You can't buy with a mortgage and that means you can't sell to a buyer who needs a mortgage, either. So once you buy, your only exit strategy is to sell to another cash buyer."

There is a bit of a fudge to get round the cash purchase requirement. Because becoming a landlord is seen as a business venture, specialist commercial mortgages and business bank loans are available. But these can be tricky to get – you'll likely need a business plan – and they can be risky, too. Entwistle wouldn't generally advise taking out a bank loan.

"I came across one investor from Southampton who was able to take out a commercial bank loan to fund several purchases in purpose-built student accommodation. But he got into difficulties when the bank called in his loan. It gave him a repayment deadline, forcing him to sell his properties. So far, he hasn't been able to find other buyers and so he's now in a spot of bother."

No long-term guarantees

A second point to consider is that total investment returns can't be guaranteed long-term. With any form of new-build property, there's a premium for the 'new' aspect. Once a property isn't brand new, its value can easily fall, meaning your capital investment could be depleted.

Rental yields are impossible to set in stone either and Neil Armstrong, a partner in real estate company Knight Frank's student property business, says: "The properties that are directly let to students (even with a management company doing the work) normally don't give guarantees."

Even the Knight Knox investment mentioned previously only assures annual net rental yields for the first two years.

As a rough guide, research from Knight Frank suggests that net initial yields in purpose-built accommodation let directly to students (that is, with no university agreement in place) are currently around 5% or better in London, and 5.5% for other prime regional cities across the UK – which include places such as Bristol, Manchester and Birmingham.

Of course, location is the most important factor when considering whether to invest. While there may be growing demand for high-quality, purpose-built student accommodation across the UK, both demand and supply vary greatly city by city. For example, lettings expert Kate Faulkner from Designs on Property says Nottingham is completely oversupplied, so much so that rents have come crashing down.

Do your research

So it's vital to thoroughly research the local market you're considering investing in. For instance, you'll need to find out what other developments are in the pipeline, with which you'll be competing to find tenants.

This information should be available from the local authority but letting agents and university's student accommodation services are also great sources of local information. And don't forget the basics.

Always visit the development, or the spot it's planned for, before you invest. Check it has good transport links to the university and find out if the property will include high-speed broadband. Both these things are top of students' wish lists when it comes to choosing a home.

"It's also important to find out about any costs you will be liable for the duration of your investment," says David Hollingworth, associate director at mortgage broker London & Country.

"For instance, the developments that are fully managed may well charge a service fee and should it decide to refurbish the complex, upgrade facilities or need to make repairs – par for the course with student lets - you need to find out what your liability will be."

Lastly, despite there being plenty of reputable companies offering investment opportunities, there are plenty of dodgy ones, too. Entwistle told Moneywise: "We do credit checks on every property company that wants to advertise on our website. From 10 minutes' research, I discovered that one company boiled down to a small holding in London with county court judgements against it. Some people had invested £100,000 in it."

Adam Price, group sales director of Select Property Group, says: "Investors need to do their homework and look at who's involved in the whole process. Who's developing the project? Who's designing the space? Who's letting it to students? Who's managing the building and ensuring students are happy once they move in? Happy students mean healthy returns."