Why PBSA is Smart Choice for Property Investors in 2019 and Beyond
PBSA (purpose built student accommodation) could make a fantastic investment choice over the next few years. It's an entirely hands-off investment that can also see great returns. It's not expensive to get into and what's more, demand in some locations is outstripping supply several times over.
Who are Typical Investors in PBSA?
Rob: Who do you think is your typical buyer or investor in purpose-built student accommodation? Who does it work well for?
Paul: It works well for everybody if they understand it fully. It has changed massively over the last 3 or 4 years. Just 3 or 4 years ago, when we started, it was for a bolder investor and now it's the majority of our investors.
Retirees and Hands-Off Investors
Paul: It ranges from anyone who is coming up to retirement or in retirement that has some cash, sat in a bank or an ISA, doing nothing, and they don't want to be a property tycoon, and they don't want to own properties, they just want a residual income, coming in.
Rob: They don't want to, necessarily, become a landlord and have to do the day-to-day management themselves.
Paul: They just want a stress-free investment because this is totally hands-off as an investment, it's handed over to a management company, which are appointed.
Paul: We've also found parents are getting involved with it. So, obviously a parent, usually, would pay for 3 or 4 years for student accommodation, for their sons and daughters. They have got one of their children coming to the university, they might as well buy something and put their children in it and then retain that as an investment.
Buy-to-Let Investors and Portfolio Managers
Paul: More recently, I've actually found people using it as a portfolio stabilizer. So, your traditional buy-to-let investors who are leveraged, who quite rightly did that - and I don't want to say that that is going to go away but we have had it very well, with low, interest rates for a long time. And I think the security of this is and the high yields it gives (you're looking up to 10% of net returns), it gives them that income that can, potentially, set other things off. So, you know, if interest rates go up by half a per cent etc.
So, it's actually seen as quite a good thing from the bank's side, that they have got this steady income coming in that has been proved for 1, 2, 3, 4 years and then that can sit beside the other properties and then they do it that way.
How Purpose-Built Student Accommodation Compares to Buy-to-Let
Paul: Basically, we can't judge now, where it is. It's just that our job is to try and explain that there is nothing bad about it. There are very few differences, in terms of where we market it and why we market it.
There are a couple of differences with how it is bought but at the end of the day, it serves exactly the same function. It comes down to supply and demand, it comes down to location, it comes down to yield, it comes down to your ability to sell it.
It's full ownership, the full title. It's no different. It's on a long lease.
Budgets and Returns
Rob: We'll touch on the pros and cons of PBSA, shortly but specifically, on an investor's viewpoint, how much of a budget is needed to get involved in something like this and why are the returns - 10% or up to 10% is great - so much better than with many of the other types of residential buy-to-let options that are out there?
So, how is PBSA achieving that level?
Paul: PBSA is very much a numbers-driven asset.
So, we, now, for example, where we are now, in Keele. We know the average weekly rent is about £155 per week.
Rob: So, it's based on rent?
Paul: It is, yes. But for the student, that's all bills, no council tax, no wi-fi, full service. It's one bill and that's it. So, it properly competes with a normal house and we've got the kitchen and the en-suite.
So, we know that there is a time of 51 weeks. We know that generally, they pay 6-12 months in advance or they have a guarantor, a parent or there are facilities out there that will help with the guarantor.
So, you work out 51 times 160, minus your service charges, your management charges. And that leaves you with the figure, in this particular place, of 10%. The purchase price, here, is about £65k. And that's it.
Rob: So, the strengths are that it is a relatively low asset cost, compared to the to all the other options out there.
Paul: That's it, it might seem a lot but when you look at that buy-to-let deposit, it's not a massive amount of money to use as you want because you also don't have the same buying costs that you would with a residential property. For example, there is no Stamp Duty to purchase one of these. They come fully furnished. The Solicitor's fees are pretty basic, the searches are done and that's it. So, you don't have all those extras on top.
When someone has a £65k budget for a residential property the odds are that's, realistically, £55k, when you look at furnishing and Stamp Duty.
Rob: And when you get a new property, you might have to do some work to it, even if it is just a bit of painting or decorating.
Paul: Absolutely and they are costs that you do not have with this. And what will generally happen is that the developer will then assign a management company, which will take over the management of that. The developer will then commit to an assurance, to the owner, saying, I will give you x-amount of x, per year, for 5 years, usually. And the reason it is only 5 years is that rents have increased by 3% to 4% in this market and in 5 years you will want to look at your true reflections, which is probably going to be around 11.5%, and that carries ongoing for as long as you want.
Supply and Demand (Example Location, Newcastle-under-Lyme)
Paul: Without being too specific, in this particular location, this is the reason we focus on this location, is because there are 3,000 beds in Newcastle-under-Lyme and 2,700 of those are on campus, there are 300 in the town centre, which is growing. What we have got, is there are 11,800 students at Keele University, alone.
Rob: So, there is nowhere near enough.
Paul: There is a 1,500 intake, this year. They expect that for the next 4 or 5 years. You have got the University Hospital, just down the road and you have also got Staffordshire University.
So, the amount of demand is incredible but there is no supply. If you put that into a residential context and, say, you were in a town with a 20,000 strong population and you have 4,000 homes...
Rob: So, landlords would be able to buy any house knowing that it's always going to have a tenant.
Paul: And that's what this does.