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Why big cities don’t mean big yields

Why big cities don't mean big yields
Apr 5, 2017
Tags: Location

As a prospective investor in student buy to let property, it might seem perfectly sensible for you to turn immediately to high profile, multi-institutional cities like London, Liverpool or Manchester.

After all, they’re cosmopolitan, lively and chock-full of students; Liverpool, for example, has a student body of around 50,000 – a population the size of Inverness. You’d think, then, that you’d be on to a sure-fire winner.

But in fact, you’d be wrong.

Beware of oversupply

CBRE, the world’s largest real estate investment manager, work to a figure of roughly 40% as a definition of saturation in the supply of purpose built student accommodation.

Liverpool is already at 47% and, according to local experts City Residential, supply there is set to double by 2020.

This is pretty much the case in Manchester as well, while 2016 saw investment in London student property fall by two-thirds.

How did this happen?

In the early days of private sector student property investment, developers rushed in to snap up prime sites in well-known university towns.

Their motivation was ultimately to sell this expensive land on at a handsome profit. Their view was that purpose built student accommodation represented a short-term income generator – which is why they only offered short fixed income periods.

These prime sites cost a fortune, which in turn led to high initial purchase prices for individual investors along with less than generous yields. These poor short-term returns also offered investors very limited resale options.


What do we do that’s different?

With around 130 universities catering for over 2 million students across the UK, there are still a number of towns and cities where saturation is not an issue; so we actively seek out locations where undersupply far exceeds the national average of 74%.

Demand is what we look for first and foremost; and not just current demand, but, since we’re offering 10-year fixed income periods, it’s long-term assurance we seek – hence the value of student accommodation investment yields.

best property investment locations

Our research and due diligence is exhaustive; we focus on 4 key areas:

1) The city itself

We take a good look at the local economy, local industry, inward investment, urban regeneration programmes, infrastructure and transport links.

Geographic location and quality of life are important too; we also take into account the relationship between town and gown, which has a significant effect on the overall university experience – and which can sometimes get lost in the larger conurbations.

2) The university

We certainly don’t set ourselves up as arbiters of academic excellence, but we do want to see evidence of continuous growth in student numbers, and we like to see significant spending on capital projects.

We monitor all the university ranking and rating systems and take note of upward trends. Student satisfaction is a very important factor in our deliberations, as are any awards or peer recognition certifications.

3) The site

‘Close-to-campus’ is our mantra; it ensures our property will maintain its appeal long into the future.

Proximity is a prime consideration for today’s student, and our philosophy is to keep to the barest minimum the number of purpose built student apartments between our property and the university campus itself.

This means that even if student numbers do fall or if the number of student units increases, we will still be in pole position as the best-positioned and most sought-after property.

This is well-nigh impossible in the bigger cities, where overdevelopment and a shortage of land consigns you to a site on the outskirts with a consequent lowering of your property’s desirability.

Indeed, wherever possible we aim to be one of the first on the scene in the local purpose built student accommodation sector.

4) The price

Again, by avoiding the more popular, higher profile cities we avoid having to pay silly money for a suitable piece of land. By selecting our cities the way we do, we ensure that we can obtain a premium site at a sub-premium price.

This also means that our developer partner, untypically in this market, can spread this cost around the 100+ plus multiple owners of the property, driving down the initial individual unit purchase price.


How does this benefit you, the investor?

Because we operate in less obvious, more affordable locations where there is clear, sustainable demand, our developer partner has been able to establish a unique, proven business model based on a long-term strategy.

This means that their principal source of profit is regular rental growth – as opposed to freehold value.

Secure property investment model

To make this strategy work, they have to deliver the highest possible build quality and then maintain the property to rigorous standards – everything that you, as an owner, would wish for.

And since they are as yield-driven as you are, it leads to a perfect alignment of interests between both parties.

With 15 successful student developments to their name, they have over the years signed 10-year fixed income agreements with thousands of investors worldwide – all receiving high yields from the very outset.

This provides attractive resale conditions for both buyer and seller; the fixed income terms are entirely transferable to the new owner, which also enables inbuilt capital growth through yield compression to the seller.

Why follow the crowd?

Economically, it makes complete sense to avoid the bigger cities not just because of the high entry level prices and poor yields, but also because there is little prospect of your returns ever improving. Saturation doesn’t just stunt rental growth, it places severe limitations on your resale prospects and puts you at the mercy of external factors beyond your control.

And in some of these cities there are now murmurings of discontent at the sheer volume of student accommodation.

But by investing where undersupply is at its most critical, everybody wins:

  • The university can attract more students, particularly from overseas
  • The local authority can free up local housing and collect council tax on it
  • Local residents see the attractive transformation of down-at-heel areas of town, and
  • Students get top-quality accommodation and facilities for which they’re happy to pay a rental premium.

And you get an 8-10% NET yield fixed for 10 years – which really does set you apart from the crowd.


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