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.

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.

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.

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.

The post FT Warns Investors About Student Investments appeared first on Aston Eaves.

Liverpool Council: Business Rates For Student Landlords

A Liverpool council led initiative to introduce business rates for student landlords could create a disastrous situation for both students and landlords.

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

As it stands right now, local councils receive funds from the government that. This, in effect, covers for all students (who do not pay council tax). In Liverpool this is just under 9,000 homes.

This is calculated through a formula grant called the Revenue Support Grant (RSG), but is to be phased out by 2020. It will then be incumbent on councils across the country to fill this funding gap. It is inevitable that should Liverpool Council succeed with this, other councils will likely follow suit.

Will it affect all student tenancies?

As far as we can tell from the proposals from Liverpool City Council it is targetting all landlords involved in letting to students. Should it go through, we don’t see any reason why councils up and down the country would not adopt it.

As at December 2015 there were 8,827 properties in Liverpool exempt from council tax as student households with a relief value of £10.6m and that halls of residence had a relief value of a further £0.28m, giving a total relief value of £10.88m. After 2020 when the RSG is phased out, this amount will effectively be cut from the city.Liverpool City Council

This means that it will affect all student landlords including:

• HMO student properties in Liverpool
• Corporate investors
• Investors of student rooms

The £0.28m relief for those in halls of residence could be protected if it is University owned stock.

But there is no reason as to why investors in private halls of residences will be exempted. This also includes student pod investments, of which there are many in Liverpool.

It is clear from the council brief that the onus is being put on student landlords to pay more while the students are recognised as a ‘welcome part… of our local economy’. Naturally, the temptation from landlords would be to increase the rent.

Grouping student landlords in with business rates is unfair

For most of us involved in property in one way or another, it is fair to suggest that uncollected council tax for student properties is an obvious area to target for councils across the country that are struggling with government cuts. It may have been reasonable to argue that council tax in line with current banding rates are to be introduced. This alone would have been unwelcome news for property landlords.

But to suggest bringing “student landlords within the scope of business rates” is a recipe for disaster. It is simply unfair to align business rates with residential dwelling. Liverpool council have tried to compare student lets with “hotels, self-catering and holiday lets” but the categorisation is unfounded. What next? Assured Shorthold Tenancies (AST) to be grouped in with commercial leases?

With clause 24 and the change in stamp duty, landlords must rightly be feeling that they are a soft target with very little representation.

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Will Brexit affect student numbers in the UK?

Brexit will affect the numbers of students coming to the UK. This will be evident in the decreasing numbers over the next few years and beyond.

Let us not shy away from reality.

To be perceived to be inward looking and closed for business is not a good position to hold. Like it or not, that is the impression we gave when we opted to leave the EU.

Some might call that continuing the fear-mongering. But if we take into consideration the Erasmus programme alone, we can see the direct impact of Brexit. Should we actually leave the EU, British students will no longer be able to be part of Erasmus. This international student exchange programme gives our students the freedom to study in the other member states. That is to say, without going through several hurdles that a student from Moldova say would have to undertake. Or Serbia. or Macedonia. Ad verbatim.

Example of how Brexit will affect student numbers

Up until a few years ago, the Nordic countries such as Sweden, Finland and Denmark enabled all students from all over the world to apply and study at their universities for free. As long as you had the grades and could pass the English language tests, then tuiton was free for all.

This changed in 2013 with the restriction placed on non-EU students. That is to say, from that period onwards, only EU residents could still get free tuition. Obviously, once Brexit comes into play, we’re lumped into the non-EU group. We will have this access to free education removed.

Now, we’re not advocates of taking things for free and not contributing to society, so we’d anticipate that some British students that went to live in Sweden for example, taking advantage of the generous free tuition, would then seek to contribute to Swedish society by working or starting a business there for example. Now that we’ve decided to leave, all those good things will come to a grinding halt.
Brexit will shape how we interact with our European partners. The example of education will swing both ways. It has already been noted by media commentators that Brexit will have a severely limiting impact on foreign students wanting to come and study in the UK.

Any effect on property investors in the student market?

As most of our subscribers now well know, we’ve had a bug bear with student pods for a couple of years now and stopped selling units to investors. However, we still have colleagues and friends that are still involved in the industry.

We think they will be affected by Brexit. Even before the referendum, the last few years already highlighted the reduced numbers of students coming to the UK. In fact, just last week, we received an email of an article detailing how a student pod development that was on the verge of collapse due to nervousness of Brexit. Fortunately for the developer, they hastily managed to arrange alternative financing. But these kind of articles show that all is not well for financing large projects i.e. nervousness feeds off instability. Projects will be affected due to the UK leaving the European Union.
International student numbers have been plummeting for years anyway, so what is our answer? If we want to encourage a diverse number of students coming to live and study in the UK, we need a bold vision of post-Brexit student programmes. We need to encourage the brightest minds from all over the world to contribute to the UK.

The Tier 4 Visa, launched by the Home Office in July 2016 is one such initiative, but is focussed on just Oxbridge, Imperial College and Bath University. It’s a start, but it needs to be developed to other universities and student types.

The post Will Brexit affect student numbers in the UK? appeared first on Aston Eaves on the 23rd of August 2016.