In this article we identify:
The towns and cities delivering the best returns for a property investor
The effect of Covid-19 on the sector
The different types of student accommodation to consider
The pros and cons of this investment strategy
If this type of investment appeals to you, read on to get the facts.
Which university towns and cities deliver the best returns?
The rental yields from accommodation let to students can be attractive, but there is a wide variance in the figures that can be achieved in different university towns and cities. Smaller centres are currently achieving the highest rental yields, i.e., the percentage return a landlord can make back on the purchase price each year before tax, mortgage payments and other costs are considered. A total of seven of the top 10 locations for return on investment are in towns or cities with one university and some have less than 25,000 students.
The lack of purpose-built student accommodation (PBSA) at smaller institutions clearly leads to a demand for housing from private landlords. The cost of property in smaller towns and cities is generally less expensive than major centres, enabling landlords to invest in traditional student housing and reap a greater return. Larger cities offer students more choice, from purpose-built student accommodation with brand new facilities to city centre apartments; also, there is competition between landlords who target popular student areas: both factors restrict their gains.
According to research carried out over the past two years by Paragon Banking Group, the top 10 rental yields vary from 9.56% to 7.62%. Only three of the cities in the top 10 – Liverpool, Coventry and Leeds – have more than one university.
The highest yields can be found in Swansea, which has one university and a student population totalling 20,375. Average houses prices are £231,534 and the average rental income is £22,140, helping realise a 9.56% yield. Hull comes in second place with a 8.60% rental yield. The average house price is £117, 742 and the average rental income is £10,224. Hull’s student population totals 14,255. The third best yield can be found in Plymouth at 8.41%; the city has an average house value of £267,287, an average rental income of £22,471 and there are 18,410 students. Liverpool delivers an average yield of 8.25%; it has two universities and 54,000 students. The average house price is £225,178 and the average rental income is £18,569. Student property in Coventry is seeing a 8.05% yield. Here, the average house price is £284,049, the average rental income is £22,879 and student numbers total 64,000.
In sixth place is Chester where rental yields of 7.92% can be achieved. The average house price is £296,766, the average rental income is £23,040 and the city is home to 13,545 students. Yields of over 7% can be achieved in Edinburgh, Nottingham, Leicester, Dundee, Sheffield, Newcastle, Cardiff and Leeds.
While these returns appear impressive, only a third of landlords let to students as they are wary of damage to their property; however, investors prepared to factor that in, can achieve stable income over the course of an academic year.
The Covid-19 effect
While the pandemic has created huge problems for student accommodation, the future is very positive according to Richard Ward, head of research at StuRents, the UK’s leading student accommodation search platform which works with institutional investors, developers and lenders. He said: “The pandemic has restricted the ability of international students to come to the UK, which in the short term has had a severe impact on the purpose-built student accommodation sector, but these students still want to come here and most want face-to-face tuition.”
“With the domestic market, most students do not want to live with their parents and demand is strong in the House in Multiple Occupation (HMO) sector. There is also a rise in the number of 18-year-olds in the UK which is expected to continue over the next ten years – more will be going to university due to an increasing participation rate so the demand pool is growing, and most will be in HMO accommodation in years two and three of their degree. Looking ahead, these factors are likely to lead to a substantial increase in domestic demand.”
“The PBSA side is still positive but it is location specific; some locations are saturated and the availability is not matched by international demand growth; the impact is hitting institutional investors more than private landlords, but impact is down to individual locations – every town or city has its own market.” Mr Ward concluded that investors are mostly positive, UK higher education is still attractive and international student numbers are growing, despite the Covid-19 blip. He noted that there is strong interest from developers and investors in York , Bath, Newcastle and Nottingham.
Options when letting to students
A landlord may purchase a buy-to-let property, which is let to a group of students who co-habit and rent the property together, or choose to operate a student HMO where the rooms are rented individually, with each tenant having their own tenancy agreement. HMO’s can offer potentially higher returns but may involve more management. A HMO is defined as having at least three tenants living in a property forming one household and sharing kitchen and bathroom facilities. Large HMOs have five or more tenants and landlords must meet standards regarding bedroom size and fire safety regulations.
The pros and cons of investing in student accommodation:
- Possibility of high yields
- Parents and/or guardians are frequently used to guarantee students’ rents and make reliable guarantors
- Consistent demand from a pool of students
- Regular income for the academic year
- Short vacancy periods
- Competition from the purpose-built student accommodation sector, especially in large university cities
- Competition from new Build to Rent property increasingly being built in city centres
- Higher wear and tear bills
- Regulatory compliance: the requirement to provide Energy Performance Certificates, annual gas safety certificates and observe other regulatory matters
- Rental voids in summer
- HMO’s need to be licensed every five years
Share your views
Do you have experience of investing in student accommodation? We would love to hear your comments on whether it is a worthwhile investment – do let us know.