Another cohort of students is about to head off to university – and with them comes an opportunity to invest in student properties.
There are certainly plenty of potential tenants: in 2015/16 (the latest figures available from the Higher Education Statistics Agency or HESA), there were 2,280,830 students in higher education in the UK – the largest recorded number of British and overseas students enrolled on courses at UK higher education institutions.
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 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.
In the past, parents have helped their student offspring on to the property ladder 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 [currently £7,500]. They can then have the income tax-free, but it takes a lot of planning.”
Another option is a ‘joint mortgage, sole title’ arrangement, where parents are named on the mortgage and are liable with their child for repayments. However, parents won’t have any ownership rights on the property, so they won’t be liable for additional stamp study or capital gains tax issues they would face if they were joint owners.
This type of deal is available from the Bank of Ireland, Hinckley and Rugby Building Society and Metro Bank.
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.
Guarantor mortgages are less common now, with smaller building societies being more active in this niche market. It is currently available from lenders including Leeds Building Society, National Counties Building Society and Virgin Money.
Other specialist products to look out for are those designed specifically with students in mind.
Bath Building Society’s Buy for Uni mortgage, for example, can work as a guarantor mortgage or as a joint 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’s Buy for Uni offers a mortgage of up to 100% of the value of the property, up to a maximum value of £300,000. The property can either be secured with a charge on the guarantor’s own home or through family member(s) having cash in a savings account with the society, or a mixture of the two. Mortgagees can rent out rooms in a standard dwelling for up to three other students or working people.
If you would like help sourcing a guarantor mortgage, you can search for a mortgage broker in your area at Unbiased.co.uk and Vouchedfor.co.uk.
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 2016, with 68,000 beds traded at a total value of £4.5 billion, according to Savills’ latest UK Student Housing research. In 2017, it expects this to rise to 75,000 beds trading for £5.3 billion – a rise of 17% year on year.
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 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.
HESA 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.”
Lawrence Bowles, Savills residential research analyst, says: “Landlords thinking about letting to students need to consider the three things that students value most about where they live: convenience, affordability and safety.
“Students don't have the time for a long journey to and from lectures each day, so a property close to campus will let faster than one the other side of town.
“Rental costs are a huge drain on students' finances, often eating up their entire maintenance loan, so cheaper properties will be much more attractive to prospective tenants. Individual landlords will struggle to provide the high levels of service and finish offered by student housing developers, so the properties they let will have to be cheaper to reflect this.
“Finally, the property must feel safe and secure – 18-year-olds moving into a new town won't feel comfortable living in areas that feel dangerous or with a high risk of crime, and nor will the parents dropping them off and funding the rental deposit,” he adds.
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’ Spotlight on UK Student Housing 2017, 10 cities topped its development league table – Bath, Brighton, Bristol, Edinburgh, London, Manchester, Oxford and St Andrews, with Birmingham, Exeter, Guildford and Leeds strong newcomers to this top tier – but bear in mind that its report is not aimed at individuals buying one property, so use it as a broad guide.
Unsurprisingly, many in the top 10 are red-brick or Russell Group universities, but sometimes lesser known universities can offer higher rental yields as the market is less saturated.
However, even leading university towns can suffer from over-supply. Liverpool has fallen out of favour, according to the Savills data. It reports that there are now 21,700 PBSA units in Liverpool, which works out at 2.1 students for each unit. With supply of a further 12,400 units in the pipeline, this ratio will fall to just 1.4 students per unit.
It also reports that Plymouth is not looking as promising as it once did. With 5,900 PBSA units, the current student-to-bed ratio is a reasonably healthy 3.7. However, with almost 3,300 units under construction or in planning, this works out a 56% growth when compared to existing supply.
Mr Bowles adds: “Student housing is an attractive, high-yielding investment, but it usually needs significant work from landlords to manage their tenants and find new students to move in each academic year. Gross returns may look high, but landlords should carefully watch their costs to make sure their investment is worth the work.”
Meanwhile, Knight Frank’s Student Property Index, which looks at PBSA rents over the in 75 cities, reports that rents went up steadily by 2.55% for the 2017/18 academic year, with 95% of the cities it covers reporting rental growth.
One trend it highlights is higher rental growth for en-suite and non en-suite rooms with shared kitchen facilities compared with self-contained studios in 2017/18, which reflects higher demand for more affordable accommodation.
Knight Frank suggests that Bath, Canterbury and Cardiff are emerging markets with room for growth, while Manchester, Birmingham and Edinburgh are considered ‘core markets’ because they contain dual or multiple well-regarded universities with increasing student numbers.
It views Liverpool, Newcastle and Leeds as ‘mature markets’, where there has been a high level of PBSA development in recent years, while Nottingham, Glasgow and Aberdeen are ‘price-sensitive’ as they have already seen a boom in development.
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.
James Pullan, head of student property at Knight Frank, says: “We expect the market will increasingly be driven by the Real Estate Investment Trusts (REITs) and pension funds as economies of scale assist these institutional buyers to create increasingly large portfolios with efficiencies of operation, branding and marketing.”
For example, two out of the 10 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 holds most of its portfolio in and around London and its focus is on accommodation for students studying in Russell Group universities or regional universities with satellite teaching facilities in London.
The UK’s first REIT focused on student residential assets, GCP has a long-term total return target of 8% to 10% a year.
Meanwhile, Empiric Student Property focuses on studios and ‘premium assets’ that attract postgraduates and international students to top university cities and towns in the UK.
However, the company is broadening and diversifying its portfolio, with Hello Student, its brand and operating company, now in 22 cities. It uses directly employed managers, which it says have a vested interested in the success of their building and in developing a “vibrant student community”.
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.