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Student property hotspots - investing in purpose-built accommodation

The rising cost of further education and gloomy graduate employment prospects has led many property investors to query whether the demand for student accommodation is as strong as ever. Existing investors may be looking to scale back their portfolio or even pull out of the market altogether. Meanwhile, new investors may be hesitant, wondering whether there are better property markets into which to sink their investment. We take a look at the student property market in two of the UK's largest and most popular student cities: Liverpool and Birmingham.

Liverpool

Liverpool's associations with youth and youth culture means it has never been short of students looking to make it their destination of choice. However, with thousands of student beds either currently under construction or in the pipeline (for example, a 1,000 bed development near Lime Street and a 776-bed development under the bombed-out church, St Luke's), is there a danger of saturating the market? If so, the inevitable consequences for the investor are high competition and poor yields. However, to reach this conclusion is to ignore several important points.

Firstly, one must assume that the existing student accommodation stock is fit for purpose. This is clearly not the case, as evidenced by Worthington Group's announcement that upgrading Lime Street's North Western Hall to bring it into line with current standards of student accommodation in the city is too costly. The Group intends, instead, to convert North Western Hall back into a hotel. 

Secondly, one must remember that much of the existing stock of student housing is located on the city's periphery, far from both the relevant university campus and the city centre. Increasingly, students are demonstrating their dissatisfaction with such relatively remote locations by expressing a preference (on accommodation applications) for city centre or campus-based accommodation. This is a trend that is also evident among the wider population of Liverpool. Thanks partly to the ongoing regeneration of the docks, developers have built considerable numbers of one and two-bedroom units - mostly flats - which are proving popular choices with young professionals in the 17-29 age bracket. Inevitably, part of the attraction, as well as living close to work, is having restaurants, shops and nightlife on the doorstep. This is a lifestyle that appeals equally to many students. 

Thirdly, it is important to note that the number of people choosing one of Liverpool's universities continues to rise. The sharpest rise came between 2015 and 2016, when the student population leapt by 10,000 to 60,000. Subsequent rises may not have been as pronounced but they still show an upward trend.

Fourthly, Liverpool's universities manage to accommodate only around 16 percent of their students. This leaves tens of thousands with no option but to turn to the private rental market. 

Fifthly, despite Brexit, the number of overseas students arriving to study in Liverpool is not merely remaining buoyant; it is rising. At the University of Liverpool, for example, 28 percent of students are from overseas. Not only is this a group of students that will always require accommodation, it is a group that, as a whole, has very strong ideas about what constitutes desirable accommodation. Recent evidence suggests that international students prefer - and are often prepared to pay a premium for - larger properties with relatively high-spec fixtures and fittings. Property investment company, One Touch, reports that studios in the city centre property, Granite House, which measure an average of 25m² and have a number of floor-to-ceiling windows, are proving more popular than similarly-priced studios that are only three minutes walk away but have an average measurement of 20m².

Birmingham

Like Liverpool, Birmingham has a strong magnetic pull for many would-be university students. Sometimes referred to as Britain's second-largest (after London) student city, its excellent, internationally well-regarded universities, and its thriving cultural and nightlife is what draws students from across the UK and from further afield. Thanks to five universities, five further education colleges and sixth form centres, and more than 65,000 students, there's a large pool of people looking for accommodation. Traditionally, many of them have found accommodation in houses of multiple occupation in suburbs such as Edgbaston, Selly Oak, Digbeth and Moseley. While demand for properties in such areas continues, and is clear from recent sold property prices, there is increasing interest in a different kind of accommodation. 

According to One Touch, Birmingham remains structurally undersupplied with student accommodation, particularly towards the upper-end (and, presumably, price bracket) of the market. It reports particular interest in gated communities such as St Peter's Urban Village in the city's Saltley district. More than just a student village, Saltley offers office space to a number of businesses and organisations that also appreciate its emphasis on security and facilities such as a cafe, fitness centre and even a village green. Minimum yields for properties within St Peter's Urban Village are put as 9 percent for the first two years of investment. Individual properties mirror the traditional shared student accommodation model, with a shared lounge area and fully fitted kitchenette. However, bedrooms, which are all ensuite, are described as "pods", and are fitted with double beds and measure an impressive 17.5 - 22 sq. metres. However, the extensive soundproofing, a fully licensed bar, secure car parking and bike storage, and high-speed internet connection further suggest that this is no ordinary student accommodation.

To invest in purpose-built student accommodation or not?

Anyone considering investing in purpose-built student accommodation will inevitably come up against several hurdles.

1. Gauging the market value of their investment can be tricky. Sold property prices are not the helpful guide they can be in other areas of the property market.

2. Mortgage lenders rarely advance money to buy this type of property. This means investors must be cash purchasers.

3. Most purchases are made "off plan" and are fully managed. This masks two risks: that the development will not be finished (or will not be finished in time), and that the management company will not have the appropriate skills to manage the development.

4. The guaranteed rents may be subsidised by inflated prices charged for the units.

5. Exit strategies are risky and usually limited to selling on to another investor.

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Source: Nethouseprices 25.01.18

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