GUIDE TOINVESTING INSTUDENT PROPERTY

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Most people associate buy-to-let investment with the purchase of one or two-bedroom

flats and trying to make single figure returns on the residential rental market. However savvy investors now associate UK property investment with the rapidly emerging student accommodation sector which is providing extremely healthy returns.

Recent research carried out by buy-to-let mortgage specialist Paragon Mortgages shows that students generated the highest yields for landlords in 2011. Using independent research from The Landlords Panel from BDRC Continental, the lender found that students generated the highest average yield, followed by young singles and retired people. At the other end of the scale, non-housing allowance benefit claimants generated the lowest yields, followed by young couples and manual workers.

Commenting, Nigel Terrington, Paragon Group chief executive, says: “Yields are an important component of a landlord’s overall business plan

because they give a good indication of the income that the property generates. Student yields typically outperform the wider market because they are let on a per room basis, which can generate higher rental income.”

Ranked yield tables – Landlords’ top 101 Students 2 Young singles3 Retired4 White collar or professional workers5 Executive/company lets6 Local Housing Allowance claimants7 Older couples8 Families with children9 Young couples10 Blue collar/manual workersSource: Paragon Mortgages

The rapidly emerging student accommodation sector is providing extremely healthy returns

INVESTING IN STUDENT PROPERTY

The fact that UK student accommodation has thrived over the past two years, rapidly outpacing the

UK’s conventional property market, has not gone unnoticed. In fact its fast growth and investment strength has been so prolific that in January 2012, The Times ranked student accommodation as the top asset class in the UK’s property market.

Knight Frank’s 2012 student property report added to the accolades, stating: “It has outperformed every other commercial property class and delivered consistent returns throughout the economic downturn.”

The marketWhen compared with other residential and commercial property, student property stands out as consistently offering higher returns for investors. 2010 saw student property offering annual average returns of 13.5% in a market where commercial property grew by just 8% and standard residential property fell in value by 1.3%.

Average returns across the UK were 11.5% in 2011 and Knight Frank expects total returns from student property to increase in 2012 to 12% with rental yields growing by 5%.

James Pullan, head of student property, Knight Frank, says: “There is a large structural undersupply of student accommodation in the UK.

“There is still strong and as yet unmet demand for properties offered to students for rents of less than £200 a week, offering investors a good opportunity in the coming years.

“New funding arrangements will come in September 2012 when tuition fees of up to £9,000 a year are introduced. However all the early indicators suggest that once again there will be more applications than places offered.”

In January 2012 The Times ranked student accommodation as the top asset class in the UK’s property market

Total returns comparisons 2011 chartPast returns from Student AccommodationAverage studio rent: £178Average en-suite rent for 2010/11: £112Average rental change (year to December 2010):

2%

Average capital value charge (year to December 2010):

7%

Rental yield (December 2010): 6%Total Annual Return 2010: 13%Total Annual Return 2011: 11.5% Forecast Annual Return 2012: 12%Source: Knight Frank Student Housing Report

INVESTING IN STUDENT PROPERTY

The popularity of student accommodation amongst investors is ultimately driven by consistent

occupancy rates of 99% or higher and a structural undersupply. Demand for purpose built student rooms amongst students is extremely high meaning average rental rates have risen year on year, increasing by 34% between 2005 and 2010.

The strongest performance in student accommodation so far has naturally been centred around the most popular university towns and cities. Durham, Cardiff, Birmingham, Liverpool and Nottingham are all good examples of where residential property prices are relatively low yet rental rates are rapidly increasing due to the popularity of the local universities and the number of students attending them.

Investors have not been slow to catch on and are capitalising on this. As a result investment in UK student accommodation has boomed over the last few years. CBRE, a world leading real estate adviser, recently released a report that stated £863 million was invested into student accommodation in 2011.

This figure represents a significant increase of £93 million compared with 2010 and a staggering 120% increase on the amount invested in 2009.

This growth trend is certainly continuing with CBRE’s latest 2012 Q1 report highlighting that £246m has already been invested into the student housing sector during the first quarter of this year. If this rate continues student accommodation investment will be 12% higher than last year.

£246m has already been invested into the student housing sector during the first quarter of this year

INVESTING IN STUDENT PROPERTY

The face of the UK university education and, consequently, the student accommodation market is

changing. Currently there is extremely high demand to attend university - a demand that far out-strips supply. In 2010 there were over 700,000 applications for just 490,000 university places.

This demand looks set to continue particularly in top-flight university cities. Knight Frank reports on a ‘flight to quality’, with students seeking the best courses for their fees. This shift in turn is predicted

to translate on to the student property market in the form of an increased demand for a higher standard of student accommodation.

AEGON Asset Management’s Kames Capital believes there are huge opportunities for those investing in the sector. Its head of property investment, Phil Clark, says: “The alternative property sectors could offer some attractive opportunities in 2012.

“In particular I believe investors should consider a greater exposure to

alternative sectors such as residential property, student accommodation or healthcare property. One of the key attractions of these alternative sectors is they generally have a high income yield, an ability to track inflation and have low vacancy rates.

“Student accommodation demand for the best universities is leading to typical annual vacancy rates of less than 2%.”

VITA Studios at The Chapel, Crosshall Street, Liverpool, L1.

Student demand for university places exceeds supply

800,000

700,000

600,000

500,000

400,000

300,000

200,000

100,000

02001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: UCASSurplus demand Accepted applicants

INVESTING IN STUDENT PROPERTY

But that is not all. The growth in university applications has been significantly influenced by a rise in

overseas students which is predicted to increase even more in the next academic year.

In 2010 the number of overseas students applying to UK universities increased by 12.5%, and there were even more in 2011. Experts have cited the appeal lies with the quality of university education in the UK and competitive tuition fees on a global scale.

Knight Frank believes the demand is going to keep on growing. Its 2011 student property report states: “Clearly, a UK university education continues to be held in high esteem around the world and this demand is set to expand exponentially in line with global wealth generation. The number of UK universities, by comparison, is a finite resource and looks set to remain so as government budgets are constrained.”

In light of the recent increase in university tuition fees, this growing trend looks set to continue. The Sunday Times explained this is because “overseas students have a different fees scale and are less

affected by the changes”. While higher fees may deter some domestic undergraduates and reduce applications, the amount of overseas students are not only forecast to remain unaffected, but are likely to increase.

With numbers of EU and domestic students capped, universities are extremely keen to market themselves on an international scale to attract more overseas students. This affects the higher end of the student accommodation market as overseas students have a higher tendency to choose quality purpose built accommodation for a number of reasons including security, location and facilities.

VITA Studios at The Chapel, Crosshall Street, Liverpool, L1.

USA 20%UK 12%France 8%China 7%Australia 7%Germany 7%Canada 5%Japan 4%All Others 30%

Top host countries of international students 2010

Source: UCAS

Source: Atlas of student mobility, Institution of International Education

EU (ex.Eire)Hong KongFar East (ex HK/Mal)MalaysiaMiddle EastAustralasiaOther OverseasEurope (ex EU)AmericasAfricaEire

-5 0 5 10 15 20 25

Percentage change in international applicants to UKhigher education institutions

USAOthers

FrChAuGe

CaJa

Source: UK Higher Education International Unit / i-graduate

USA

Australia

UK

Canada

Singapore

New Zealand

Netherlands

Malaysia

China

Germany

0 £5,000 £10,000 £15,000 £20,000

Country rankings - average annual tuition feesfor overseas students

UK

VITA Studios at The Chapel, Crosshall Street, Liverpool, L1.

USA 20%UK 12%France 8%China 7%Australia 7%Germany 7%Canada 5%Japan 4%All Others 30%

Top host countries of international students 2010

Source: UCAS

Source: Atlas of student mobility, Institution of International Education

EU (ex.Eire)Hong KongFar East (ex HK/Mal)MalaysiaMiddle EastAustralasiaOther OverseasEurope (ex EU)AmericasAfricaEire

-5 0 5 10 15 20 25

Percentage change in international applicants to UKhigher education institutions

USAOthers

FrChAuGe

CaJa

Source: UK Higher Education International Unit / i-graduate

USA

Australia

UK

Canada

Singapore

New Zealand

Netherlands

Malaysia

China

Germany

0 £5,000 £10,000 £15,000 £20,000

Country rankings - average annual tuition feesfor overseas students

UK

Overseas students have a higher tendency to choose quality purpose built accommodation for a number of reasons including security, location and facilities

INVESTING IN STUDENT PROPERTY

S imilar to overseas students, mature students also opt for higher quality student accommodation

usually within private, purpose built developments. The changes in tuition fees will also have an impact as Knight Frank’s 2011 student property report explains:

“Changes in the way that higher education is provided in the UK will change the face of the student population.

“With universities under increasing pressure to provide more two-year degrees and work-based learning (particularly in professions such as surveying, accountancy, business and media), the number of mature, part-time and post-graduate students is likely to increase significantly, as is the average age of students.”

Mature students also opt for higher quality student accommodation usually within private, purpose built developments

INVESTING IN STUDENT PROPERTY

The growing demand for student accommodation, especially higher quality developments, comes at a time when this type of property is in short supply. And we all know what happens with limited supply and growing demand... It is a major opportunity for investors.