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Student Property Investment - The Facts

18th June 2012

Student Pod investment has most definitely been the “buzz word” in property investment over the last year.

It seems new pod developments are being marketed on a daily basis but are they really all they are cut out to be?

Let’s look at the facts:

History of student property investment

Let’s start with the reason all of these private student halls are being built?

The 2010-2011 academic year saw grants for capital projects, such as new buildings, cut by 58% in cash terms to £223m. In the 2009-2010 academic year, universities received £532m for building works.

Because of this universities were not able to respond to the increased demand from students and had to start to rely on 3rd party builders to satisfy that demand.

Student Pod developers can be easily classed into 2 different categories.

1. Large developers that are cash rich and can build out with their own funds:

This type of developer can afford to purchase a site, gain planning then forward sell to a fund at between 5-8% yields. Generally the developer will secure a FRI lease from the University for 25 years or so. The fund will then agree to purchase on completion.

2. Smaller developers or land owners that want to maximise their profit from land owned:

This type of developer/land owner generally either has an option on or owns the prospective land but does not have the funds to build out. They need to find 3rd party funding outside of the mainstream. These are generally the types of development that are offered to the individual investors.

3rd Party funding is provided by the investors who put down a percentage of the purchase price on exchange which is used by the developer in the construction process.

The absolute key to this type of proposal is to protect the investors deposit, this can be done by staging the tranches in which it is paid to the developer and making sure that a solicitor holds all deposits in a client account. For the developer to receive funds an independent architect would need to sign off each build stage.

How are they priced?

Good question, I will show you how they should be priced first of all.

  1. You decide what you want to build, so self contained pods, houses or flats.
  2. You work out what rental each room should achieve and the number of weeks they will be rented at
  3. You then work out the monthly, then yearly income that can be derived from the site, taking away the maintenance and management fee to give a net figure, divide this by the yield you want to offer and this gives you a sale price.
  4. Take away the agents fee and the site cost and you have net profit to the developer.

If the developer is happy with the level of profit then the investment goes to market, if not, it should be canned.

The Problem:

I won’t beat around the bush, its greedy developers or agents.

Normally when you get to point 4 above and it doesn’t work then it’s the end of the line, unless the developer wants to take less profit or the agent wants to take less commission.

What seems to be happening now is that investment companies use astronomical weekly rentals along with a high number of rental weeks to achieve higher rental returns, and in turn higher sales figures. Sometimes they guarantee this for a year or two but this is just worked into their profit.

I’m seeing a lot of opportunities that are advertised with a guaranteed return for 2 years but with absolutely no comparables to show what these pods will rent for after those 2 years.

An example, if we work to £100pw over 50 weeks -20% for management and maintenance = £4,000 (£40,000) on a 10% yield.

If this doesn’t work, increase the figure to £125pw over 52 weeks – 20% for management and maintenance = £5,200 (£52,000) on a 10% yield.

So you’ve paid £12,000 more for a property already, the developer can afford to guarantee this for 2 years because it will only cost him £3,000 if he rents at the figures of £100pw over 50 weeks.

The downside for the investor is that not only have they paid £12,000 more for the property, but their property will only be achieving a 7.6% yield after the first 2 years!

How would I know if the rentals are realistic?

A good investment company should provide you with full due diligence on the investment opportunity offered. It isn’t enough to offer a guarantee, you should be provided with comparables that show the rental being guaranteed is correct.

All investment companies should have conducted this due diligence as its service to you, if it’s not been done; you need to ask yourself why.

Don’t bury your head in the sand….You need to conduct your own due diligence as well, you can do this by phoning the university accommodation office and ask them about the area you are looking to buy the pod in, also speak to letting agents, its sometimes best to pose as an existing landlord, say you are looking to let your property and ask what you may get for it.

Is Student Accommodation sustainable and what happens if the market declines?

Whilst student numbers remain strong, yes it is. Liverpool universities showed an increase in student numbers last year and good quality student accommodation in favourable areas will always be in demand. What we will start to see is the death of the single landlord that owns a badly furnished house in an average area. I know when I was a student this was our only choice outside of halls. We will see good quality student houses and apartments that are regularly refurbished and well managed flourish but ones that are not will decline.

The management of student accommodation has moved forward massively over the last 10 years, gone are the days that a large percentage of landlords shied away from the student market; with a strong professional management company there should be no more hassle renting to students than there is to professional tenants.

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