2016 was a strange sort of year, with some unexpected results from the world’s ballot boxes leading to uncertainty in the global markets.
Here in the UK, interest rates were cut to an all-time low and the pound plummeted against the dollar and the euro.
It was a good time to have a high yield fixed NET income – so here’s why Student Property should be part of your portfolio in 2017.
1) Purpose Built Student Accommodation (PBSA) – property’s high flying asset class
For the last five years, PBSA has been the star performer of UK property. Since 2011 it has consistently delivered UK property’s highest yields and in 2015 it attracted a record £4.2bn of investment (Savills).
In the same year, the Wall Street Journal recognised it to be a World Class Asset.
But it’s also rather a well-kept secret. To many, it still comes as a surprise that a private individual can own a unit in a purpose built student block.
The truth is that the traditional Halls of Residence are a burden to the universities, which welcome the private sector’s involvement. Better accommodation attracts better students and maximises fee income for higher education providers.
At the same time, it provides developers and investors with an asset for which there is long term demand.
2) Record UK student numbers
According to the UCAS End of Cycle Report (December 2016), a record 535,200 students entered the UK higher education system in 2016.
1.9 million places were offered to students, an increase of 1.2%.
And courses with an October 2016 deadline received 57,190 applications – up by 1%.
Mary Curnock Cook, the UCAS Chief Executive, notes
“The combination of higher fees and the removal of central controls on recruitment numbers have changed the relationship between students and universities…When I took over at UCAS in 2010, students chased places – now the places chase them.”
The UK’s student population has been on an upward trajectory for the last 15 years and this trend continues; with around 130 universities and nearly 2.5 million students, higher education is big business for the economy.
3) A British degree – highly prized worldwide
The UK is second only to the US as a student destination; last year 430,000 overseas students came here to give themselves a head start in life with a globally respected qualification earned in an English-speaking environment.
The current exchange rates mean they are more willing and able than ever to seek out premium accommodation at premium rental rates. They also tend to take out longer rental contracts as they are effectively looking for a year-round home.
4) PBSA in very short supply
The boom in student numbers has not been matched by a surge in the provision of student accommodation.
Quite the reverse, with 74% of students nationwide unable to access PBSA, their preferred choice.
Such unsatisfied demand works in the investor’s favour, as it creates high yields and occupancy rates of 99% (CBRE).
5) Designed and built with students in mind
Today’s students pay significant tuition fees; consequently they have high expectations of their overall university experience.
When choosing their final university destination, near the top of their wish list is comfortable, modern accommodation well located near their social and academic centres. They want first class amenities and facilities onsite, and they want their everyday lives to be as uncomplicated as possible.
This is what PBSA is designed to deliver, and why it can command a rental premium of up to 40%.
6) 8-10% NET income fixed for 10 years
When a developer retains the freehold of a purpose built block, it’s a sign of commitment and quality. It means that they’re expecting to make their profit over time from continuous rental income growth, not from a quick initial sale.
This is why they can offer their buyers long-term fixed yields – because it’s in their interests too that the property retains its investor appeal ten years on and thereafter.
CBRE reckon that, as a rough guide, any city that has 40% student access to PBSA has reached saturation point; experienced developers will avoid these areas.
Instead, they’ll focus on universities with ambitious expansion plans. They will already have a substantial student population, but also a real shortage of student accommodation.
Because most student blocks are 100 units or more, economies of scale can be made both on the purchase price of a central site and on day to day operations by installing a management team onsite.
As a consequence, buyers benefit from reasonable purchase prices and higher NET yields.
7) Landlordship without the headaches
Changes in the law have made it much harder to buy, own and run a traditional buy-to-let (BTL) property.
Stamp Duty surcharges are in place at purchase and Article 4 legislation makes converting a residential property a complex and costly affair.
And even when the property is ready, there’s the time-consuming process of vetting, letting and rent collection. There’s the matter of being on call to solve major and minor issues for your tenants, plus unexpected repair and replacement costs. There can also be costly void periods between tenancies.
A property management company could do this for you, but at a cost.
PBSA relieves you of all these burdens.
For a start, it’s classified as commercial property; as such, it is exempt from Stamp Duty below £150,000 at purchase, and from Capital Gains tax at resale.
The purchase price includes 24/7 onsite management; the team is responsible for all operational details of the property, from a blown fuse to a blocked drain.
The team also carries out regular room inspections, to nip any issues in the bud. They arrange all lettings, collect all rent and automatically transfer yields to your bank.
Buyers enjoy an effortless income with no proprietorial responsibilities and no extra costs for the 10-year term.
8) Overseas appeal
The pound’s recent trials have made exchange rates extremely favourable.
This, coupled with the UK’s transparent legal system and straightforward ownership laws, makes UK property even more attractive for 2017.
The fully-managed, hands-off nature of PBSA ownership makes it ideal for overseas investors.
9) Popular at resale
80% of all PBSA sales last year were of operational properties with proven income delivery.
If you have a 10-year fixed income period, it is fully transferable to a new buyer – so they benefit from generous yields while you enjoy yield-driven capital growth .
Make 2017 the year you explore the investment potential of PBSA – find out all you need to know on our website.