A growing number of landlords are looking to take advantage of rising rental values in the student property sector, research shows.
Investment volumes in student property in the UK reached an all-time high of £5.1bn in 2015, more than doubling the previous year’s figure of £2.41bn, but growth is expected to continue due to strong market demands, according to the latest report from property firm Knight Frank.
The property consultancy projects that the year-on-year rental growth witnessed in 2015 within the student property sector will continue this year, leading to a rental uplift of 3.5% over the course of 2016, providing a relatively secure income base for investors.
Knight Frank predicts that the development pipeline for purpose-built student accommodation will fall dramatically across parts of the country in 2016, especially in London, which in turn will place upward pressure on rental values.
London and Manchester are prime examples of cities with large student populations and very modest delivery pipelines, according to Neil Armstrong, partner, Knight Frank Student Housing Valuations.
He commented: “In 2015 Student Accommodation showed rock solid occupational demand supply credentials. Rental growth averaged at 3.65% as student numbers grew and supply struggled to meet demand. Whilst the macro picture (3.65%) is relatively steady, each market demonstrates different credentials largely depending upon the current level of structural under supply together with the development pipeline and its delivery in any specific year.”
Across retail, office and industrial, student accommodation offered top capital (15.3%) and total returns (21.5%) in 2015, which partly explains why the sector is attracting greater institutional investment.
James Pullan, head of Knight Frank Student Housing, said: “Of the 49,271 student bedrooms transacted in 2015, over 46% were acquired by Institutions. This wave of Institutional investment has now polarised the market such, that assets which fail to meet institutional specification have much reduced liquidity.”
Beware the potential pitfalls
Despite the growing popularity of investing in student housing, student property investment specialists, the Mistoria Group, is urging investors to be fully aware of the potential pitfalls of investing in student property, and in particular student pods.
Mish Liyanage, managing director of the Mistoria Group, commented “If investors are considering student rooms, otherwise known as student pods, they need to look at not only the opportunity, but also the risks too.
“Unfortunately a major disadvantage of student pods is their resale value and capital growth potential. The value of property will fluctuate with the market and the pool of potential investors is much smaller than for other types of student accommodation, such as HMOs and flats.
“With a normal buy-to-let, you can sell the property at any time on the open market, through a reputable estate agent and expect a reasonable capital appreciation. However, selling a student pod will encounter problems. For example, who decides the market value? As a piece of real estate per square metre it is very expensive, at double the average market value, and there is no established resale market. Who will sell it? Is it an investment, or is it a piece of real estate?”
Liyanage says that there is also an issue around guaranteed rental returns, insisting that the guarantees are only as good as the person, or firm that is promising it.
“Investors need to weigh up whether they think providers of student pods are robust enough to stand behind the guarantee,” she added. “They [buy-to-let landlords] also need to be aware that the guarantee may not stand in five years’ time, when their investment could have devalued as new developments have been released.”
However, despite the big pitfalls of student pods, Liyanage accepts that student property is a “very profitable asset class giving robust returns”.