Property developers have turned their focus to luxury student accommodation as university-goers no longer content to live in cramped and grotty digs seek gym access and parking. The promised returns are high. But should investors wade in or steer clear?
Knight Knox, a Manchester-based property developer that also operates in the Middle East, is offering “assured” returns of up to 8 per cent in purpose-built student accommodation. It is promoting investment in developments that have gyms, parking and proximity to universities. One even has a cinema room.
Knight Knox is one of many property developers offering buy-to-let investment in student accommodation as private landlords leave the sector in droves because of tougher regulations and more demanding student tenants. Listings for student housing by private landlords have fallen 45 per cent since 2019, said the estate agency Hamptons. In Medway, Kent, they are down 85 per cent, and in Sheffield, Dundee and Salford they’re down more than 70 per cent.
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This is despite huge and growing demand for student accommodation, particularly from a higher number of overseas applicants who are willing to pay much more than their domestic counterparts. There were 2.18 million domestic students in the 2021-22 academic year, up 15 per cent over five years, according to the Higher Education Statistics Agency. Over the same period the number of non-EU students — most overseas applicants come from outside Europe — increased 79 per cent to nearly 560,000. The number of students from the EU fell 13 per cent to about 120,000.
In 2022 there were a record 767,000 applicants through the Universities and Colleges Admissions Service (Ucas). Ucas predicts there will be a million by the end of the decade.
StuRents, a student accommodation analyst, said there is already a lack of student accommodation, helping to push up rents by about 10 per cent over a year. It estimates a shortfall of 490,000 beds by 2026. Universities are building more accommodation to cater to demand, as are property developers, but there are significant risks to investing in them.
How demand is changing
With students now used to taking on debt to pay fees, it seems they have become reluctant to accept lower standards of accommodation.
Over the past decade there has been renewed interest in the “quality and impact of the accommodation experience”, according toa survey of 20,000 students by the estate agency Knight Frank and Ucas. They found that the average annual cost of private purpose-built student accommodation is £7,865 a year compared with £6,160 for those living in university-operated accommodation and £6,860 for students living in privately rented house shares.
Why are landlords leaving the sector?
Since 2018 local authorities have required landlords to have licences to let property where five or more people from at least two different households live. Houses in multiple occupation (HMO) licences cost about £1,000 to every five years. These licences were previously required only for properties of three storeys or more.
All rooms must now be of a minimum size, so small box rooms are no longer allowed.
How to invest
Hamptons said more property developers are offering investments in student accommodation — particularly in the north of England, where property prices are lower so the income (or yield) tends to be higher.
If you google “investing in student accommodation” Knight Knox is the first sponsored ranking. The company says it has almost 20 years of experience in the property sector. It is presenting the opportunity to buy student accommodation from about £80,000, offering “assured” returns of 7-8 per cent a year after costs over three to ten years. The developments planned for Huddersfield, Sheffield, Stoke-on-Trent and Salford will have amenities such as private gyms coffee shops, parking, concierges, shared gardens and study areas. All will be within walking distance of the university campus.
The company can put you in touch with a specialist mortgage broker, Mortgage Connections, if you wish to borrow to invest, but this adds to the risk. Most lenders will not lend on incomplete properties. Mortgage Connections does not pay commission to Knight Knox, according to its website.
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Investment in the developments is not regulated, and there is no protection from the Financial Services Compensation Scheme if the firm holding your money goes bust. The scheme protects up to £85,000 if a regulated organisation you invest with goes under. You may also struggle to sell your investment since it cannot be traded like shares.
The Knight Knox website states: “Guarantees and protections when investing in property can come in the form of things like rental guarantees for a set number of years or build warranties to name a few, and they can vary from project to project.”
Knight Knox was approached for comment.
Another option is to buy property. Places where property prices are higher, tend to offer a lower return (yield). The lowest yields are in areas such as Cambridge, where the average rent is £1,760 a month but the average property is worth £513,040, according to Hamptons,giving a 4.1 per cent annual yield before costs. By contrast, in Nottingham the average monthly income is £1,180 but the average property is worth £195,630, meaning a 7.2 per cent annual yield.
Buying properties directly has its own risks. Aneisha Beveridge from Hamptons said: “In some cases what can look like a very promising gross yield on paper for these types of properties can quickly turn into an average net yield or profit after energy bills, maintenance, finance costs and taxes. It’s important to do your sums before taking the plunge.”
Emma Wall from the investment platform Hargreaves Lansdown said: “The main problem with any direct form of bricks and mortar property investment is that there is little or no diversification, and they aren’t easily bought and sold. It’s time-consuming, labour intensive and expensive. It is also one of the least tax-efficient ways to invest.”
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Another way to invest is through shares in established student accommodation providers such as Unite, a real estate investment trust (REIT). These are investment companies that are like managed funds but are listed on the stock market, making them easier to trade. Unite is a FTSE 100 company with a portfolio of 157 properties across 23 cities, and has been around since 1991. Its share price is up about 9 per cent over five years (compared with 4.3 per cent for the FTSE 100), with a dividend yield of 3.62 per cent. Shares can be held in an Isa or pension, making them free of income, capital gains and dividends tax.
Another REIT is Empiric Student Property, a FTSE 250 company that has been around since 2014 and has a portfolio of about 80 properties. Its share price is down about 6.5 per cent over five years (compared with 6.8 per cent for the FTSE 250) and it yields 3.9 per cent.
The wealth manager Evelyn said only 2-3 per cent of its managed portfolios contain real estate. Jason Hollands from Evelyn said: “Generally we are cautious towards property in this environment of high borrowing costs. Of the two specialist trusts focused on student accommodation, Empiric has bounced back the strongest since the pandemic, but the larger Unite Group has a more diversified portfolio.”
If you want exposure to property in a broader portfolio, Bestinvest, the DIY investment arm of Evelyn, recommends the UK Commercial Property REIT, TR Property Investment Trust, and iShares UK Property exchange traded fund.