Success When Investing in PBSA Comes From Choosing the Right Location
Finding the right location to invest in purpose-built student accommodation is no different, in many regards, to finding the right location any other type of property investment. Fundamentally, it comes down to understanding supply and demand in the area and weighing up your income against your costs.
How to Choose the Best PBSA Developments
Rob: Paul, how do you choose the developments? How do you choose the sites, when it comes to PBSA? What is it that makes a site work or not?
Paul: Residential Estates is a company I run and our whole idea is to bring the best investments, possible. And this is still a property investment. It's no different to anything else, apart from a couple of features. It comes down to the main criteria, like location, close to the town centre and the university. Supply and demand. Under-supply and over-supply. It's very popular for investors to want to go to the big cities but the big cities have a lot of supply. There are other choices, such as private accommodation.
Rob: There are lots of developments in the pipeline, as well, for those. So, even if you get one now, you might be competing in 2 or 3 years time.
Paul: Because developers know, rightly or wrongly, that people want to buy there, so, they will fill that market and then there will be a surplus.
For example, we know for a fact, in Sheffield, there is a surplus of supply, when compared to demand.
Price, land prices. To build something in an area like Keele is far less expensive than to build something in Manchester. Yet, the rents that are asked for, are the same.
So, if you took that on a residential side... Property A is being sold for £80,000 is £500/week and property B is being sold for £100,000, with the same rent... The £80k property has a better yield.
Rob: Of course, so, the asset cost is going to be higher in those kinds of areas.
Paul: And when you have got that yield, the greater the yield you have got, so, let us say, 10%, the greater your exit strategy for the re-sale on the commercial value.
We choose it that way. So, it's not, necessarily, just looking for what we think people want. There are two ways of buying student accommodation. There is buying where you think is right, as in just with an iconic name or, as I said before, with a football club or whatever it may be. Or, there is thinking, right, I'm willing to invest this cash in this market because I think it's got a future. So, I'm going to get the most money, for my cash.
Focussing on Demand
Paul: So, one of the reasons that focus here is that there are about 2,700 beds on campus, in Keele. There are about 400 purpose-built student accommodations, currently available and there are 13,000 students. So, that's why it works for us because we work with the one developer that is working here and there's no way you could build for the next 20 years and fill that quota.
Rob: Specifically in Keele, are there other sites that are cropping up to fill that demand?
Paul: We've got 2 sites that are ongoing so, obviously, this is complete, it's been up and running for 2 years. We've got one that will be ready next year. And then we have got another one that will be ready for 2020. And then I know he (the developer) has got other ones in the pipeline.
But even with the intake, this year, being 1500.... 1500 is a lot, there are only 160 here and it is a fair-sized building. So, as far as we can see, it is never going to stop. The supply will always be there and unless Keele University ceases to exist, along with the University Hospital then we can't see demand falling.
Rob: Are you happy to check things like the rankings? Purpose-built student accommodation requires student tenants who want to come to good universities. So, are you checking that the local universities to see if they are up to standard or if they have had good historic results?
Paul: And, if they concentrate on one, certain thing. We know that engineering universities do very well. Keele is a medical university, hence it has got a university hospital, as well. And that brings in students of a particular niche. So, you look at rankings, they are important.
One of the problems with Keele is that no one has ever heard of it but it is ranked above John Moores, it is ranked above Sheffield Hallam, it is ranked above De Montfort but they are, probably, names that you know.
People want to come here and when they come here and when they go on to the University Hospital, they will be here for 6 or 7 years rather than 3 or 4. And because of the size of the town, you know that most of these students are in need of accommodation because it is not an area where... If you live in Liverpool, you can go to Liverpool University and stay at home. That is not an option here. There isn't that kind of accommodation, there might be the odd one, scattered around because there is a residential area.
So, to us, it is the perfect storm. Everything is in place, to have everything that would tick normal, investor tick-boxes, as in yields, location etc. But it's just in a student format.
Rob: So, you are looking at it from a student point-of-view, you are making sure that the university delivers and then you are looking at the area, not as secondary but as part of that, where I guess, most people, when it comes to straightforward buy-to-let, they will gravitate towards the areas they might know or the football teams that they might know of and then they'll say, well, I hope there is a good university there because we want to rent to that. This way round, you are making sure that you have the supply.
Due Diligence and Research
Paul: It's just about doing your research. If you are in that market then it is an investment of your cash and that investment should be trying to get you the best opportunities, possible. The only exception is if you are buying for a son or daughter and they are going to a particular university then, obviously, you are going to buy there. But when it is an investment then it's a case of, I like this market, I now understand PBSA a little bit better, I understand how I can sell my property on, I understand my returns, I understand that it is stress-free.
So, what I might as well do is have a look around and see what's offering the best deal because, ultimately, that is the most important thing, that is what you would do on any other property investment.
Rob: You look at what those towns and cities are delivering.
Paul: And you are usually looking north because, again, we are talking land prices. I have no idea what a London based PBSA costs but it will be a lot of money. And again, it would probably be a very small yield but when you are looking at northern areas, so, this, places like Sunderland, Hull etc.. You get good value for money and the fact is, they are largely forgotten by other developers because bigger developers will want bigger profits. They will go to the areas where they know that people, especially from the overseas market, will probably buy.
Rob: They are gravitating the £200k+ apartment buildings.
Paul: And quite right. If the developer is looking for something that they can get the most out of, that doesn't mean, for the individual, it is the best investment.
So, we try and do that and try and say to people, if you like that market, that's great but have a look at this because this ticks every box that you could have, more so than a lot of other places. It's about understanding and debunking those myths that this is anything other than a property investment.
You own it. Everything is there. No restrictions, you can sell it whenever you want. It is the same any other one but it is just dedicated to students, just like it would be if it was dedicated to professionals.
Rob: There's a strong level of due diligence, consideration needed to identify a potential site and a market.
Paul: It is all about the numbers and the socio-economic factors that are going on and it works very well, I would say. We feel it's certainly going to be a market that is going to be around for a long, long time.
As things are going on, as the student intake grows, it makes sense for every single facet of the investment.
PBSA (Purpose-Built Student Accommodation) vs. HMOs (Houses of Multiple Occupation)
Rob: We were having a chat off-camera about the difference between buy-to-let, HMOs, PBSA and about how PBSA seems to be, as you said, the future of where students are wanting to be. They get a lot of services provided with it, they get a fantastic location, generally.
Paul: It's perfect and the one thing they don't have, which we discussed, is, fundamentally, with HMOs, there is nothing wrong, in theory, but it is taken into account, when you see these high returns, those returns don't take into account the costs that come with it.
So, when you have to put a lick of paint on it, or do the roof, or do whatever it is, or repair the damage that has been caused, that is out of your profit whereas with PBSA, you don't have that and it is getting the returns without any of the headaches.
Rob: You see things with a slightly different figure than there should be. A lot of times we see HMOs that are promoted on the theory of what they could deliver. The reality can be very different when you factor in the management and maintenance. It can be quite intensive. There are properties and locations that can work but I think that the future does involve PBSA.
Paul: It does. I think the only thing is, which we can understand, in relation to the HMO market, is that PBSA is not a residential house that has been converted. It's not something that you can release money on to re-invest. But because it is a cash investment and because your yields are so high, obviously, if you are in it for 5 years, you will be getting 50% of your money back. So, effectively, if you manage that money well, you are releasing that money. As that can then be used for whatever you want, after that.
But that's the only difference and that's the under-30 square meters, generally. They are good-sized studios but that is why it is a cash investment.
But I think people are finding that more comforting, knowing that they don't have to worry about interest rates, it is Brexit-proof, at the end of the day. That money is meant to work well for you for a long time.
And we also know that one of the questions is around re-sale. But we also know that if your circumstances change, we never get asked to sell anything early because they are getting a 10% return. And if you are getting 10% returns and it's actually coming in.
Rob: People are quite happy to hold on to it.
- Why purpose built student property is the most viable UK investment option
- HIgher education in numbers
- Higher education student statistics 2016/17 - HESA
- The scale of UK higher education transnational education 2015-16 (.pdf)
- Patterns and trends in UK higher education 2018 (.pdf)
- Living it up: student accommodation trends
- Student housing review (.pdf)
- Town v gown: Is the student boom wrecking communities? (Guardian, Sep 2018)