Wednesday, 21 December 2016

FT Warns Investors About Student Investments

A study conducted by Ernst & Young prompts the Financial Times to publish an article on the challenges faced by student landlords.

liverpool council student tax increase

Will Liverpool be the first city in the UK to bill council tax to student landlords?

While the idea of investing in student rooms was the buzz term in 2013 and 2014, we’ve been warning our clients to give it a wide berth for a number of years now.

“Investors who have poured billions into student accommodation over the past two years are likely to be hit by falling student numbers over the coming decade.” Judith Evans, Financial Times

A recent article by the Financial Times has now cast further doubt over investing in Purpose Built Student Accommodation (PBSA). Whether you’re already tied into student property already or you’re looking for student investments in 2017, the article is worth reading.

This type of articles is nothing new, mind.

For example, backed by newspaper reports at the time we’ve said that Liverpool is saturated with student room investments. But we’re still receiving emails about a new boutique development in the “under-served Liverpool student market”.

Admittedly, there has been a dramatic decrease of promoted developments, but they’re still there if you look hard enough.

If anything, these developments are often touted around South East Asia such as Malaysia or Singapore. More recently, we know of developers that have pushed this type of investment in China.

The European Referendum vote in summer 2016 is a key moment where incoming student numbers have had to be revised, but even prior to this, the number of students accepted into UK universities had taken a dip.

number of students being accepted to universities to decrease

This shows the projection of students is to go down over the coming years (Source: FT)

With Brexit taking shape in one form or another, the above projection by Ernst & Young clearly shows the direction of travel for students going to university. Compounded by the incumbent Government taking an anti-immigration stance, the incoming foreign numbers are now expected to reduce even more.

Taking into consideration that a lot of these student rooms are targeting the more affluent end of the student market – especially the Chinese market – we can’t see who will be attracted to these expensive private halls of residence.

population forecast for 18-19 year olds

The population forecast of 18 to 19 year olds is due to go down over the coming years

How to benefit from the unsustainability of PBSA

We are keeping an eye on the market. When things go sour with this type of investment – and it’s inevitable that they will in certain areas – it will be a time to pick up a bargain from desperate investors who bought into the student room hype.

It must be remembered however that a lot of these PBSA developments were bought using cash from individual investors. So it is possible that they may be happy to sit on their investment and generate a meager rental return. The heady days of 10% net guaranteed return will have expired by Brexit takes effect and it will be interesting to see what happens.

An added complication is that the blocks would, in most cases, have different investors own different rooms on a leasehold basis. How an entire block would be sold with an agreement between the owners is an entirely different conversation.

It all sounds rather messy.

However, where an opportunity does present itself, as long as it can be snapped up for the right price, it will be a question of how to generate a rent roll from it. Whether that involves planning to convert the entire blocks into more useable rental space for the open market or finding a creative solution for these small studios will be dependent on the size of the development and the location of it.

Very much like what the FT article says, we think that PBSA investors in ‘second division universities’ will struggle. While it mentions Coventry, Liverpool, Durham and Leicester in the article, we certainly do not consider all of them to have second rate universities, but that is merely our opinion.

In certain locations where there still is a genuine shortage, then PBSA will still do fine. In most cases, this will be where the university education is highly regarded and there is a genuine shortage of student accommodation for local and international students.

The areas that are perceived to have a lower class of university are the areas which will suffer. The local students can opt to live at home instead of paying £135 per week for a glorified bedsit with a flatscreen TV as per the sales brochure (Aren’t all TVs flatscreen these days anyway?).

An Alternative View: PBSAs Are Here To Stay

To play the devil’s advocate for a moment, could it be the FT writer is coming to a conclusion prematurely?

It could be argued that local councils have encouraged the building of PBSAs to free up space in houses that could be used in the Private Rented Sector (PRS) i.e. forcing frustrated landlords to sell up.

In the eyes of the councils, it is then preferable that homeowners move in.

Alternatively, buy-to-let landlords purchase the house to provide a home to local residents (instead of students).

The concentration of students is then focussed in select parts of town which reduces local complaints of noise, disturbance etc. and makes the whole thing a lot more manageable.

Tied in with some councils actively pushing for council tax on student houses (such as Liverpool Council or Brighton Council), the immediate thought of a student landlord is to sell up.

The above is all before considering the failed judicial review of Clause 24 tax changes that are due to come in during 2017.

What next for student investments in 2017 and beyond?

It has to be said that there are dark skies ahead for all landlords – whether that is for PBSA investors or otherwise.

The key thing is to secure yourself down over the coming years and to ride the wave. Whether that is paying down debt, reducing the number of investment properties or getting yourself on a long term guaranteed rent scheme, it will be incumbent on you to speak to your accountant to plan the years ahead.

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