You may have seen the advertising. 8% p.a. guaranteed yield. Fastest growing sector of the property market. Transactions running into £billions each year. Must be a good investment, right? Be very wary....
Purpose build student accommodation
To be clear, I am talking about buildings constructed from the outset for the use of a university city's student population, not houses or flats converted for student use.
The glossy brochures look great. For a few tens of thousands, you can own a student room in a brand new block, just minutes away from a university in a large city and will receive a guaranteed high rental return. How can that not be a great investment? Here's how -
Student rooms are small, typically around 120 to 150 square feet, The selling price per square foot is usually around double that of a normal buy to let studio in the same area, but the construction cost is much the same. The developer has a huge margin to subsidise the guaranteed rent, pay big commissions and still be left with a very handsome profit.
Unrealistic rental guarantees
Often, the guarantee is not borne out by the local market rents. In such cases, you have paid your own guarantee through an inflated purchase price. As many an investor has found to his cost, it is not unusual for the rental income to fall considerably when the guarantee period expires.
There is no secondary market for student rooms. Second hand units are all but impossible to sell. Banks and building societies won't give a mortgage on them and cash investors will only buy them at rock bottom prices, if at all.
High operator risk
Student accommodation operators can and on occasion do go out of business. Now the rental guarantee has gone, investors are left with a unit they cannot sell and, unless they live in the same city, probably cannot rent out because letting agents don't deal with them.
In principle, student accommodation should be a great investment and for pension funds who buy entire buildings, it is. Until retail investors are able to buy at a realistic price, with a clear, reliable exit strategy and without the true returns being masked by doubtful guarantees, this is one to avoid.
If you really want to be in this asset class, there is at least one Real Estate Investment Trust out there, but do bear in mind that REITs are shares, subject to price gains and falls due to stock market sentiment as well as the fundamentals.