A guide to investing in student accommodation
With A-level results out on 18 August, another cohort of students will be heading off to university this September – and with them comes an opportunity to invest in student properties. There are certainly plenty of potential tenants; in 2014/15 (the latest figures available), there were 2,266,075 students in higher education in the UK.
Some parents may think twice about forking out rent for three or four years when they could invest in a property for their children – and if they can afford to buy a house that will accommodate four or five students, there is the potential to receive a good rental income.
For those who don’t have children or those of student age, there is still an argument for investing in student houses or purpose-built student accommodation (PBSA). Developers in this specialist sector are keen to entice landlords with guaranteed initial rental yields and the promise that a management team will handle with all the day-to-day issues.
One good thing about buying a property for your child is that they can take control of managing the property, picking up valuable life skills along the way. But if you are doing it yourself, don’t be put off by the thought of dealing with a bunch of teenagers who may have never lived away from home before.
Sally Fraser of Stacks Property Search in Brighton says: “Investors can be concerned that collecting rent from a group of young people barely out of teen-hood with no income is a risky business. In reality, there are systems in place that make rent collecting straightforward, and students invariably come with guarantors in the shape of parents.”
While parents will be keen to help their children get on the property ladder, few can afford to pay cash up front. But you don’t necessarily have to dip into your savings. Instead, you can offer your children access to mortgages they couldn’t get on their own.
With this type of mortgage, a parent (or close family member) guarantees to repay the debt if their child defaults on the loan, using their own home as collateral. Smaller building societies tend to be more active in this niche area – though many providers of guarantor mortgages do expect students to earn an income. If you would like help sourcing this type of mortgage, you can search for a mortgage broker in your area at Unbiased.co.uk and Vouchedfor.co.uk.
One to look at is Bath Building Society’s Buy for Uni mortgage. Available to students in higher education throughout England and Wales, this mortgage can either be made in the sole name of the student or jointly between the student and their parents. If it is in the student’s name only, parents will have to act as guarantors – and they must be based in England and Wales.
It will lend up to 100% of the value of the property, up to a maximum £300,000. The amount your child can borrow will depend on the income they will receive from letting out rooms. The property must be in England or Wales and within a 10-mile radius of your child’s university. For more information, visit Bathbuildingsociety.co.uk.
Loughborough Building Society is also launching its Buy for Uni mortgage in the autumn. Also offering 100% loan to value, and with a maximum borrowing limit that is yet to be confirmed but will be at least £250,000, the property can either be secured with a charge on the guarantor’s own home or with cash, or a mixture of the two. Mortgagees will be able to rent out rooms in a standard dwelling for up to three other students or working people.
Another way parents have helped their student offspring on to the property ladder is by taking out a joint mortgage. However, this route has become less attractive since April 2016 when the additional 3% stamp duty on second homes came into effect.
If you already own a home, you will pay an extra 3% stamp duty on your share of your child’s property because it will be viewed as a second home.
Stuart Law, chief executive of buy-to-let agency Assetz Property, explains: “Parents might buy a flat for their child with one or two beds so they can rent out a room, which is very cost effective. But there are tax implications and you may have to pay a 3% stamp duty on second homes – so it’s probably better to gift your child the cash. They could take out a mortgage with a parent as guarantor.
“The child then has the property in their name and can rent a room using the annual rent-a-room tax break [from 6 April 2016, this is £7,500]. They can then have the income tax-free, but it takes a lot of planning.”
Legal points to consider
While it can feel awkward to ask your child for any joint ownership arrangements to be put in writing, it could cause friction further down the line if you don’t.
The best arrangement for parents and children who buy a property together is to own it as tenants in common. This means that each party will have their own share in the property, which will go to their estate when they die, so they can decide what to do with their share in their will. In contrast, as joint tenants, the whole property will automatically pass to the other party when they die.
Lisa Gibbs, a partner at Simpson Millar Solicitors, says: “If parents are buying jointly with their child and the property is in all three names, then they will need to set out quite clearly who owns what share of the property. They should own the property as tenants in common so they can set out who owns the majority share, which also needs to be taken into account in terms of tax liabilities.”
Ms Gibbs advises parents and child to sign a ‘declaration of trust’ so they can set out who owns the shares, as well as a bit of background to the transaction – how much the parents have contributed, for example. This costs from around £250 for a solicitor to draw up.
“If one of the parents dies and the other remarries, you want to be sure who owns what share of the property,” she warns.
The other option is for parents to gift the money so the property is just in their child’s name. Parents won’t then be subject to any mortgage or tax liability. “Parents may be happy to give £20,000 or £30,000 to their child to get them on the housing ladder, but they need to be aware that they will lose control of the money,” she adds.
Five tips on buying a student house
- Location is everything. It must have good connections into town. Speak to agents that deal with student accommodation and establish which are the most popular areas, and in which streets houses go first.
- Easy access into town is important, but student accommodation doesn’t need to be in the best areas. Houses can be on a busy road or have a view of the gas works, so long as the university is nearby and rent is low.
- The best accommodation tends to be three to four bedrooms. One bathroom is fine, two is better, and a separate toilet makes sense. A patch of outside space is good, but avoid large gardens that will require maintenance.
- Seek out newer or well-modernised property that is easier to maintain. Avoid the kind of period property that requires constant attention as this will eat into your yield and create the need for void periods while you make essential repairs.
- Kitchens and bathrooms should be modern, but basic. Provide robust equipment that isn’t easily broken. Flooring should be hard wearing; paintwork should be plain – it can be cost effective to use kitchen/bathroom paint that can be wiped down in high-traffic areas, such as hallways.
Source: Stacks Property Search
Purpose-built student accommodation
The purpose-built student accommodation (PBSA) market experienced an exceptionally strong year in 2015, with 74,500 beds traded at a total value of £5.6 billion, according to Savills’ UK Student Housing research, published in May 2016.
While one of the main reasons to invest in this sector is that it offers good rental yields, it is not a good choice if you’re looking for capital income. PBSA will also have a limited market of buyers if you decide to sell up.
Another problem is finance because you can’t take out a buy-to-let mortgage for this type of accommodation. You will have to rely instead on commercial mortgages or cash.
Paul Mahoney, managing director of advisory firm Nova Financial, warns: “PBSA isn’t suitable for growth-focused investors, as it is the rental yield that makes this type of property attractive. It will not increase in value at the same rate as standard residential property.
“PBSA investments can be difficult and potentially expensive to finance as they are considered commercial investments, which is why they are more suitable for cash buyers,” he adds.
Where should you buy?
If you’re not tied to a city where your child will be studying, then research from industry insiders can help you to decide where to invest.
The Higher Education Statistics Agency is a great source of information on the income that universities receive, while the Times Higher Education produces an annual university financial health check.
Mr Law advises: “One of the key tests is how financially strong the university is. You don’t want to invest in student accommodation if the university could go bust.”
Both Savills and Knight Frank produce annual reports ranking cities in terms of their current and future supply/demand for PBSA, flagging up the university towns where there is a shortfall in accommodation and student numbers are robust.
In Savills latest report, 10 cities topped its development league table – Bath, Brighton, Bristol, Edinburgh, Kingston upon Thames, London, Manchester, Oxford and St Andrews, with Birmingham as the only newcomer to this top tier – but bear in mind that its report is not aimed at individuals buying one property.
Percentage of full-time students unable to access PBSA
|September 2016 (estimated)|
|Newcastle upon Tyne||62%|
Source: Knight Frank Student Market Review 2016.
Unsurprisingly, many in the top 10 are red-brick or Russell Group universities, but sometimes less well-known universities can offer higher rental yields.
Merelina Monk, a partner in Knight Frank’s student property agency team, explains: “Predominantly for security, investors will always look at top universities, such as Bristol, Oxford and Cambridge. But because these towns have a higher level of accommodation, it’s often difficult to find land or, indeed, if you look at the supply/demand demographic there’s already quite a high level there for the number of students within the city.”
In London, most student property developers have been priced out of the market, so developers have started moving out to Tube zones 4, 5 and 6, such as outer London areas Stratford and Wembley.
You also need to bear in mind that rental yields will be lower in London than they are in the regions or in lesser-known university cities.
“In prime London, yield wise, you’re looking at 4.5% for student accommodation, while in prime regions in the Russell Group – so, again, Edinburgh, Cambridge and Bristol – you’ll be looking at 5.5%. But once you move out to second-tier universities – Plymouth, Bournemouth, Portsmouth, Norwich, Chester and Canterbury, for instance – you’re looking at rental yields of between 6% and 6.5%,” Ms Monk explains.
“There are some cities where you may start to see that 6.5% creep closer to 7% where the university’s standing isn’t as good and where general property values in the area are a little bit lower – perhaps Stoke and Preston,” she advises.
Student property funds
For those who don’t have the desire – or cash – to invest in bricks and mortar, you could consider investing in funds specialising in the PBSA market. For example, two out of the five companies in the Property Specialist investment company sector specialise in student property: GCP Student Living and Empiric Student Property. Both companies are listed on the London Stock Exchange so private investors can buy shares directly in these companies too.
GCP Student Living, which also trades on the London Stock Exchange, currently holds 96% of its portfolio in and around London, and 4% in Bristol.
The UK’s first real estate investment trust (REIT) focused on student residential assets, GCP says that an investment in the company will suit institutional, professional and highly knowledgeable investors.
Nick Barker, a director at GCP Student Living, explains: “In a nutshell, our investors are typically those seeking long-term uncorrelated exposure to alternative UK property. Most of the return being derived from income, with defensive qualities and the potential for continued income growth.”
In contrast, Empiric Student Property focuses on assets in prime central locations in top university cities and towns in the UK. The company is listed on the London Stock Exchange so private investors can buy shares directly in the company too.
It invests in mid-sized properties (50 to 200 beds) mostly outside London, in central locations within walking distance of the university.
Empiric’s chief executive Paul Hadaway says: “The typical customer demographic in Empiric properties is skewed toward postgraduate and international students, who are more likely to have the financial means/backing for such premium student accommodation. International students typically pay their rent for the academic year up front, which means the risk of not receiving their money is virtually zero.”
However, Patrick Connolly of independent financial adviser Chase de Vere is not a fan of this sector: “Student accommodation funds can appear to offer attractive yields, a steady and reliable income stream and could be boosted further by the weakening of sterling which makes the UK a more attractive proposition for overseas students.
“However, investors need to be aware that student accommodation investment funds are high risk. They are often based offshore, are unregulated, highly leveraged, have high charges and can suffer from poor liquidity, meaning it might be difficult to get your money back when you want it.”
“We don’t invest in any student accommodation funds, believing that they are more suitable for institutional rather than retail investors. While we don’t invest directly in student accommodation funds, we do use some broad-based property funds, which can have exposure. For example, the Henderson UK Property fund typically has a small exposure to student accommodation,” he adds.
For more on this type of fund, visit www.moneywise.co.uk/investing/funds.
The practice of locating your financial affairs (banking, savings, investments) in a country other than the one you’re a citizen of, usually a low-tax jurisdiction. The appeal of offshore is it offers the potential for tax efficiency, the convenience of easy international access and a safe haven for your money. However, offshore is governed by complex, ever-changing rules (such as 2005’s European Union Savings Directive) and, as such, is the exclusive province of the wealthy and high-net-worth individuals.
A hugely unpopular tax paid on property and share purchases. Stamp duty on property is levied at 1% for purchases over £125,000 (£250,000 for first-time buyers) which then moves up at a tiered rate. For property between £125k and £250k you pay 1%, then 3% from £250k up to £500k and then 4% from £500k to £1m and then 5% for properties over £1m. But unlike income tax, which is “tiered” and different rates kick in at different levels, stamp duty is a “slab” tax where you pay the rate on the whole purchase price of the property. On shares, stamp duty is charged at a flat rate of 0.5% on all share purchases. Figures correct as of May 2011.
The general term for the rate of income from an investment expressed as an annual percentage and based on its current market value. For example, if a corporate bond or gilt originally sold at £100 par value with a coupon of 10% is bought for £100 then the coupon and the yield are the same at 10%, or £10. But if an investor buys the bond for £125, its coupon is still 10% (or £10) and the investor receives £10 but as the investor bought the bond for £125 (not £100) the yield on the investment is 8%.
Loan to value
The LTV shows how much of a property is being financed and is also a way to tell how much equity you have in a property. The higher the LTV ratio the greater the risk for the lender, so borrowers with small deposits or not much equity in the property will be charged higher interest rates than borrowers with large deposits. The LTV ratio is calculated by dividing the loan value by the property value and then multiplying by 100. For example, a £140,000 loan on a £200,000 property is a LTV of 70%.
These are mortgages to help first-time buyers get on the housing ladder whereby parents or relations stand as security for the loan by guaranteeing to pay the mortgage in the event of the purchaser failing to make the repayments. The guarantor mortgage is taken out in the purchaser’s name, but the guarantor’s income is used to guarantee the mortgage borrowing but this enables the first-time buyer to borrow more money than his or her own income as the guarantor’s income (less any other financial commitments) is also taken into account.
The catch-all term applied to investors who buy properties with the sole intention of letting them to tenants rather than living in them themselves, with the proceeds from the let usually used for the repayment of the mortgage. Buy-to-let investors have to take out specialised mortgages that carry higher interest rates and require a much bigger deposit than a standard mortgage. Other expenditure can include legal fees, income tax (on the rental profits you make), capital gains tax (if you sell the property) and “void” periods when the property is unlet.
Everything you own: all your assets (property, cars, investments, savings, insurance payouts, artwork, furniture etc) minus any liabilities (debts, current bills, payments still owed on assets like cars and houses, credit card balances and other outstanding loans). When you’re alive this is called your wealth; when you’re dead, it becomes your estate.
This is a mutual organisation owned by its members and not by shareholders. These societies offer a range of financial services but have historically concentrated on taking deposits from savers and lending the money to borrowers as mortgages, hence the name. In the mid-1990s many societies “demutualised” and became banks. One academic study (Heffernan, 2003) found demutualised societies’ pricing on deposits and mortgages was more favourable to shareholders than to customers, with the remaining mutual building societies offering consistently better rates. In 1900, there were 2,286 building societies in the UK; in 2011, there are just 51.
Investment trusts are companies that invest money in other companies and whose shares are listed on the London Stock Exchange. As with unit trusts, private investors buying shares in an investment trust are buying into a diversified portfolio of assets (to reduce risk), which is managed by a professional fund manager. Investment trusts differ from unit trusts in two important ways: they are listed on the stockmarket and so are owned by their shareholders and are closed-ended funds with a finite number of shares in issue. This means the share price of investment trusts might not reflect the true value of the assets in the company (known as the net asset value, or NAV) and if the NAV value of a share is £1 and the share price in the market is 90p, the trust is said to be running a discount of 10% to NAV. But this means the investor is paying 90p to gain exposure to £1 of assets. Investment trusts can also borrow money and use this money to buy investments. This is known as gearing and a geared trust is thought to be more of an investment risk than an ungeared one.