Investing in Student Property: Pros and Cons for Landlords
For generations, the UK has remained a highly regarded centre of education and is home to some of the top universities in the world. Driven by this demand, student property is an incredibly lucrative investment opportunity with a proven track record of strength and resilience in times of wider economic uncertainty.
Although some predicted that first-time students would defer their first year of university due to the pandemic, UK university admissions service UCAS reported a record number of applicants for a university place for 2020/2021.
In addition to this, the National Student Accommodation Survey, 2021 showed that 88% of students still chose to live in some form of student accommodation this academic year, despite the concerns of some investors that more students would study remotely from their family homes due to the pandemic.
The Different Types of Student Accommodation
Historically, student property investment largely referred to Student Houses of Multiple Occupancy (Student HMO). Today, Purpose-Built Student Accommodation (PBSA) has transformed student property into one of the UK’s fastest-growing property sectors, with investment coming in from all over the world, generating high and consistent rental yields for investors globally.
Before we measure the pros and cons of investing in each type of student property, let’s take a look at the difference:
Purpose-Built Student Accommodation (PBSA)
Designed, developed and managed to deliver a high-quality living experience, PBSA has established itself as the strongest student property sector with high demand from domestic and international students.
Typical amenities include strong Wi-Fi, communal working spaces, building management and security, a gymnasium, event hubs and more. Because these properties are built for purpose, they tick all the boxes of what today’s students are looking for, encouraging retention for the duration of their study period, allowing investors to take a hassle-free approach.
Student House of Multiple Occupancy (Student HMO)
This type of accommodation is a shared student house with a communal kitchen, living area and bathroom. Typically, these are outdated terraced houses, renovated to accommodate as many students as possible, often meaning small bedrooms and living areas. Demand for HMOs is reducing due to the uplift of other high-quality purpose-built options with more space, better facilities and more central locations.
As with any investment, there are risks associated with both types of student property. To help you make the right investment based on your objectives, we’ve compiled a list of pros and cons for each:
Pros of investing in PBSA
- High-demand offering – This type of accommodation is designed to meet the demands of today’s student rental market and therefore has the modern design, layout and amenities students are willing to pay a premium for.
- Confidence in the market – Despite the uncertainty of the student property market this academic cycle, 2020 was a record-breaking year for PBSA, with GBP 5.77 billion of investment in the PBSA sector in 2020.
- Better location – Because multistorey PBSA generally requires less ground space, the developments are usually built, in prime city-centre locations close to the university – increasing the chances of high yields and capital growth.
- Rental guarantee – With new properties, credible developers often offer a rental guarantee period, reducing the risk of your investment whilst the development establishes its reputation in the local market.
- Building management – Most PBSA has building management, maintenance and security, offering investors a hands-off, hassle-free experience.
- Option to invest off-plan – If you invest in off-plan student property, you can benefit from below-market rates and possibly capital appreciation over the build period.
- Stronger retention rate – PBSA generally has a higher retention rate than Student HMO, as students tend to have a more positive living experience. PBSA is designed to encourage a sense of community, making tenants more likely to stay for longer if they know other people in the building.
Cons of investing in PBSA
- Capital growth may not be as high as residential property – Although PBSA tends to generate higher rental yields than residential investments, capital growth may not be as high. However, this is expected as they are generally cheaper to buy than residential property.
- No mortgage option – It isn’t possible to get a mortgage on PBSA, meaning investors pay the costs upfront.
Pros of investing in a Student HMO
- Typically cheaper to buy – HMOs tend to have a lower price point than PBSA and owners can rent out individual rooms to multiple tenants.
- Reduced risk of missed payments – If one tenant decides to move out, you still have income from other tenants to fall back on.
Cons of investing in a Student HMO
- Lower demand – Students are getting tired of the low standards for student accommodation and are expecting more from their homes – a trend accelerated by COVID-19. Student HMOs don’t typically offer the same amenities and high-quality style as PBSA.
- Investors’ legal duties – Since the ‘The Licensing of Houses in Multiple Occupation Order 2018’ came into force on 1st October 2018, more properties will need to be licensed for the protection of their tenants, giving owners extra legal responsibilities.
- Higher maintenance costs – As the properties tend to be older and of lower quality, they are generally more expensive to maintain and issues tend to arise more frequently.
- Difficulty securing a mortgage – It can be difficult securing a mortgage for an HMO compared with residential property, although this is the case with all student property.
- No building management – Student HMOs are generally more of a hands-on investment, requiring the investor to personally manage any issues or outsource to an agent.
The key things to consider in any rental market are location, quality and facilities – three factors prioritised by the PBSA sector. Investing in student accommodation in prime cities with Russell Group universities presents a high-demand investment opportunity with strong potential to drive high and consistent returns.
Select Property Group is the exclusive sales partner of Vita Student, the UK’s leading PBSA provider. With a total of 26 developments in operation or in construction across the UK and Europe’s elite university cities, Vita Student has paid out over GBP 87.3 million in rental income to investors in just 8 years.
Vita Student maintained an occupancy rate of 89% throughout the pandemic, demonstrating the strong demand for high-quality PBSA and the resilience of the UK property market in times of wider uncertainty. Great news for our investors, Vita Student also saw a 7% year-on-year rent increase across the portfolio from 2018 to 2021, achieving 65% higher rental amounts than the UK average.
“Vita Student is a hassle-free, fully managed investment model that’s proven to generate strong returns for our investors globally. We built the highest-quality developments in the best locations and provided award-winning standards of customer service to thousands of UK students. The result is one of the biggest success stories in UK property investment history.”
Adam Price, CEO, Select Property Group