How to make money from students

The past four years or so have seen the emergence of a group of specialist property funds focusing on what may not seem a particularly promising market - student accommodation.

But growing expectations that digs should be comfortable and safe, chronic shortages of quality housing, and a 33% increase in the number of full-time students in the UK over the past decade have turned the market around.

Purpose-built student accommodation investment, through purchasing individual and managed units or via a specialist fund, has proved to be a solid, hassle-free proposition.

In effect, it's a managed version of buy-to-let (BTL), but with less risk of void periods, tenants lined up further in advance and historically higher yields.

Also, returns have held up well through the property slump. The Brandeaux Student Accommodation fund, for example, has grown on average 8% a year since launch five years ago, with minimal volatility.

The sector has been particularly strong for income generation. Savills' 2010 report on the student accommodation sector estimates that average weekly rents for students rose by 12% from 2007-08 to 2009-2010, and average yields are now around 6% - higher than the average yields in the wider residential BTL market, which are below 4%.

But government cutbacks to funding threaten to cast a pall over the sector. The number of new students this year has been capped at 50,000 to reduce support costs, so universities will see funding slashed by around 6%.

Students are also facing higher tuition fees as a result of an enquiry into the current situation where they are capped at around £3,000 a year, so more may have to study at a local university and live at home.

Supply and demand imbalance

However, Marcus Roberts, a member of the research department at Savills, explains that a "significant imbalance" between demand for and supply of housing is likely to remain.

For a start, where the numbers of UK students are reduced he expects universities to target the lucrative non-EU overseas market, whose students tend to be able to afford the higher rents of purpose-built accommodation.

Moreover, it's likely that the funding cuts will push institutions to release cash by selling off their student halls of residence, many of which are in need of refurbishment or redevelopment.

"Cash-strapped universities will be increasingly keen to outsource the provision of accommodation to the private sector," says Roberts.

There are also important differences between one university town and another. Stuart Law, managing director of property investment company Assetz, says those focusing on the government's preferred STEM subjects (science, technology, engineering and maths) will be less hard-hit by the cuts:

"Liverpool, for example, which is big in science and technology, is facing a budget cut of 0.3%, compared with 3% for London." Universities majoring in property or finance-related subjects, in contrast, are likely to see a fall in student demand.

Elsewhere, some university cities are seriously under-supplied, including Edinburgh, Glasgow, Oxford, Cambridge, Reading, and especially London.

How to invest

For investors looking for a bricks and mortar investment, this sector is an interesting proposition.

It is possible to buy individual units through an investment company such as Assetz, Watkin Jones or Property Frontiers (the latter is offering individual purpose-built rooms in Liverpool at just £40,000, with a massive 10% net yield).

Law suggests that buyers will pay around £250,000 for a five-bedroom fully managed "cluster" unit, so they will need a 30 to 35% deposit.

"It's a rock-solid income generator once you've cleared the mortgage - most people use the rental income to pay off a repayment mortgage, so by the time they retire they will be on a 6% net income," he says.

You could also use an adviser to access a specialist fund such as those offered by Braemar Group or Brandeaux. "Clients like it because student accommodation is a very easy story to understand and this fund has an extremely consistent track record," Law says.

The Mansion Group joined the party last December with its Mansion Student Accommodation Fund (minimum investment £10,000), and has achieved returns of 25% in the first six months.

It is focusing on the top 30 towns in terms of the imbalance between student numbers and available beds, and so far it has investments in Manchester, Liverpool, Oxford, Nottingham and London.

However, these funds are generally designed as accumulation funds, with income rolled into total returns rather than paid to investors.

This article was originally published in Money Observer - Moneywise's sister publication - in August 2010

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