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Why student property is the best asset class in the UK for overseas investors

Over the last two years, there has been a huge surge in student housing investment activity and student accommodation is certainly big business in the UK right now.  Last year alone saw over £2 billion of investment from UK and overseas investors in this booming property sector.

Since 2011, student accommodation has outperformed all other traditional property assets and has been the strongest growing investment property market in the UK.  It has also continued to be one of the most resilient investment sectors, with rental incomes and property values remaining stable, or increasing.  The attraction of the student accommodation sector has been driven by structural undersupply and positive rental growth year on, despite the economic downturn.

Fig 1 Total returns year to September 2013: Source Knight Frank

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The average gross cash rental yields for the student property sector in the North West of England were 13% for the first three quarters of 2014, well ahead of the 6.37%* forecast for average student property yields across the UK, for this year. (*Source: Savills Report: The UK’s student housing sector, May 2014).  What’s more, the yields are 6-7 per cent higher on average than the buy-to-let market as a whole, which stood at 6.2%* between April and June 2014.

Mish Liyanage, Managing Director of The Mistoria Group comments: “Investing in student accommodation offers overseas investors a long-term investment option, as the property is highly likely to be in constant demand throughout the calendar year.  Typical rents are significantly higher for student properties, than a comparable Buy-to-Let property in the same city.

“What’s more, the domestic student population is continuing to expand, with an extra 30,000 university places offered in 2014.  UCAS have reported they are expecting an all-time high of 500,000 applications this year.

“Students will pay more in the UK for high quality, well-maintained accommodation than for the traditional run down and neglected shared houses, because there really isn’t a big price difference between poor and high quality accommodation. The vast majority of students want to live in high quality, shared accommodation, with good internet access and affordable bills, so the better quality properties are highly sought after.

“Whilst the number of students is rising, so are the costs of rent for student accommodation, providing investors with much higher yields.   A HMO (House in Multiple Occupation) property can provide an 8% minimum cash yield, though we provide a typical 13% cash yield, including 5% capital appreciation.

“I believe it is realistic for numbers of international students in higher education to grow by 15%-20% over the next five years.  There is no cap on the number of students who can come to study in the UK and the structural undersupply will continue to remain in all key university cities ensuring excellent sustainable rental growth.”

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PRESS ARTICLE: Warning of rent guarantee scheme dangers

letting agent todayA leading figure in the lettings sector is warning that investors and landlords can be left out of pocket by hundreds of pounds and with tenancy problems if they fall for so-called ‘guaranteed rent’ schemes.

Under a guaranteed rent arrangement, the landlord is required to sign over the property to a company or letting agent for a specified period of time in return for a guaranteed monthly income.

The agent then sublets the property and manages the tenancy.  Rent guarantee firms make their money on the difference between the rent they pay the landlord and the rent they receive from the subtenant. Most schemes promise to cover any void periods and maintenance costs.

But Mish Liyanage, managing director of The Mistoria Group, says things often go wrong if the rent guarantee firms do not have the financial resources to back up their promises

“There are many firms out there offering guarantee rent schemes, many of them very small companies or sole traders. The risk to landlords and investors lies in the financial security of the rent guarantee provider. If they get into financial difficulty or go bankrupt, the landlord many not be able to recoup any monies paid to the scheme” says Liyanage.

The landlord or agent could also be saddled with a tenant that is not paying the rent, despite having paid an ‘insurance’ to protect them from this.

“What the landlord does not usually realise is that their property could be rented to asylum seekers or large families claiming benefits. Subletting to housing benefit tenants for example may be in breach of the buy-to-let mortgage conditions and could result in mortgage companies insisting that loans are repaid” says Liyanage.

One of the few ways to protect themselves is by having a commercial lease between the landlord and the company, plus an assured short-hold tenancy agreement for tenants.

Some unprofessional rent guarantee schemes get landlords and investors to sign ASTs and then issue licences to tenants. This fails to provide any protection to the landlord or investor.

This article first appeared on Letting Agent Today on 3rd November 2014.