According to the UK’s leading independent real estate consultancy, Knight Frank, purpose built student accommodation has been the country’s highest yielding property asset every year since 2011.
This success, coupled with the increasingly complex and unrewarding buy-to-let sector, has made it ever more popular with both private and institutional investors.
Here are our five key drivers behind the sector’s success:
1) Growing demand for UK university education
The number of new students accepted by universities has continued to grow rapidly over the past decade.
Back in 2006, 390,890 students were awarded places at UK universities. Last year, a fourth consecutive record year for intake, that number increased by 37% to 535,175.
Indeed, 2016/17 witnessed record intake levels for both UK and EU (excluding UK) students, at 465,480 and 31,350, respectively, while overseas student numbers hit their third highest ever level.
2) Lack of suitable housing
The other contributing factor to the supply/demand imbalance is the fact that, despite this growth in the student population, the provision of dedicated student housing has not even been close to keeping pace.
Global real estate services provider, Savills, calculated that on average only 26% of students have access to purpose built student accommodation (including university halls) in towns and cities across the UK.
There are also huge regional variations, with traditionally popular investment locations like Liverpool and Manchester having become increasingly saturated with private stock, while a number of regional urban centres – Stoke, Preston, Bradford and Leicester, for example – have access levels closer to the 20% mark.
In the case of Stoke, which has two thriving universities, this means that 17,941 students are having to live in the private rented sector – which leads us nicely on to the next point.
3) The wider housing shortage
As touched upon above, the large undersupply of purpose built student accommodation has meant that in many UK university cities, students are forced to find housing in the private rented sector.
In addition to often being sub-standard, poorly located and inconvenient for students moving to a new city or even country, there is also a critical shortage of such homes in the UK.
Indeed, the number being cited for new homes required has been continually factored upwards, with a recent government report stating that “more than 25 million homes could have to be built in England in the next 25 years”.
This has led to legislative moves by the UK government and local authorities to actively funnel large transient populations, such as students, away from residential housing and into purpose built accommodation.
One of the key approaches which is achieving this is invoking Article 4, which enables councils to curb the conversion of residential properties into homes of multiple occupation (HMOs). This frees up more housing for local families, while also providing councils with increased council tax income – from which students are exempt. It also means that any HMO-licensed property not used for such a purpose for a certain period of time will have its license revoked.
The upshot of all of this is that local authorities, and indeed the UK government, are actively incentivised to encourage the development of purpose built student accommodation.
It also ensures that all stakeholders benefit from such developments:
- Universities are able to provide quality housing options to prospective students – a key factor in selecting their place of study
- Local authorities can free up more properties for families
- Residents benefit from access to more housing, as well as the positive impact this increased supply has on curbing escalating rents
- Even the parents of students benefit as a result of the enhanced security standards that exist in purpose built accommodation
4) The decline of buy-to-let
Buy-to-let landlords have been on the receiving end of efforts to address the UK’s housing shortage.
In the summer of 2015, the Chancellor announced the phasing out of the offsetting of mortgage interest against tax.
The move attracted considerable comment in the media, particularly when it was followed in November of the same year by the news that a Stamp Duty surcharge would be levied on all second homes.
Key legislative changes:
- Abolition of tax relief – until now, landlords have been able to claim tax relief on mortgage payments at their marginal rate of tax. Between April 2017-2020, all landlords will be taxed on the full amount less tax relief charged at 20%; thereafter, tax relief will be scrapped completely
- Abolition of wear and tear allowances – until last year, landlords could deduct 10% of the annual rental income for wear and tear. Today, only actual expenditure can be charged
- Changes to Capital Gains Tax – reduced last year to 10%, except for those selling property (in which case basic rate taxpayers are charged 18% and higher rate taxpayers 28%)
The changes in practice
Take, for example, a higher rate taxpayer with a £100,000 interest-only mortgage owning a flat producing £750 per month rental income and costing £1,000 per year in service charges and ground rent.
In March 2016, they’d have made £1,560 NET profit. In April 2020, the same landlord and the same property will make just £360 NET because of the changes in legislation.
And the upshot?
“All these changes would seem to indicate that the days of mortgage-leveraged buy-to-let property are probably over – especially for higher rate taxpayers.
By April 2020, even assuming an investor can satisfy the PRA’s new affordability conditions, a buy-to-let mortgage will make little economic sense – as the example above clearly demonstrates.
We are speaking to landlords every day, who have simply had enough.”
– James Harrington, Business Development Manager, Emerging Property
5) The effortless nature of the investment
High yields are one thing; effortless high NET yields that are predetermined, contracted and fixed in place for up to 10 years quite another.
Some landlords might argue that they have been able to eke out yields of around 8% gross on some especially well performing properties. It has to be considered, however, that this would have taken a lot of effort and involved a fair amount of uncertainty and stress – not to mention that it would have almost certainly been before all the ongoing legislative changes.
In the case of Emerging Property, all our student properties provide investors with 8-10% NET annual income fixed for 10 years. This is a true NET income, with zero costs throughout.
The large size of purpose built student accommodation, which usually has 100+ units per building, means that economies of scale enable professional management teams to be positioned onsite. This ensures both a more cost-effective and higher standard of management and maintenance.
A similar situation is true when it comes to the purchase of the freehold, all furnishings (both initial purchase and replacements), marketing the property and dealing with any void periods – economies of scale reduce both the expense and level of risk involved.
Indeed, such is the effortless nature of this type of purpose built student accommodation investment that the vast majority of our clients have never set foot inside their property – many not even inside the country.
All owners simply receive automatic quarterly payments into their bank account of choice, 100% aware of the amount that will be deposited. This represents a level of assurance completely absent from buy-to-let property investing and enables investors to focus on other financial dealings elsewhere.