Student housing cities are among the highest yielding buy to let hot spots according to new research from HSBC Bank.
The top 10 for best student housing yields include Oxford, Cambridge, Southampton, Manchester and Nottingham – all popular university cities.
But are the claims made by property sellers offering guaranteed returns really grounded in reality?
According to the Advertising Standards Association, no one can offer an equity discount or yield without knowing the market value of the property.
So how do guaranteed yields work if no one can forecast the value of student housing five or 10 years down the line?
That’s where the biggest risk of investing in purpose-built student housing comes.
The developer typically offers:
- To find tenants
- Manage the property
- Guarantee a yield
First, the investment is generally in cash – costing around £40,000 – £60,000 a room. Forget mortgaging the room as lenders cannot take security on just part of the property. Then add to those legal fees and other set-up costs.
Another option is buying units in a fund that runs student housing.
The investment is probably unregulated if the developer or agent does not have Financial Conduct Authority registration. That means complaints cannot go to the Financial Ombudsman if the deal turns sour and the investment is outside the Financial Services Compensation Scheme.
The risk of losing all the investment cash is high.
To guarantee the yield, the developer must have a cash reserve to dig into should rents fall or property prices rise. The risk for the investor is the developer or managing agent gets their sums wrong and cannot deliver the guarantee promise.
The worst case scenario is the block is sold or the managing company goes into liquidation leaving the individual investors high and dry as creditors in a queue to get their money back.
Certainly, student housing investment is not for the fait-hearted.
“Despite the high headline yields often touted, student accommodation funds are high risk,” said Patrick Connolly of financial advisers Chase de Vere. “They are usually based offshore, are unregulated, have high charges and can suffer from poor liquidity, meaning it might be difficult to get your money back when you want it. They are more suitable for institutions than retail investors.”