Why should I invest in student accommodation?

With more students going to university and college each year – the number has increased from 1.8 million in 1997 to an estimated 2.4 million students in the UK in 2011 - and a huge shortage of accommodation, there is a huge opportunity to make a high passive income from investing in high quality student accommodation located in cities with prestigious universities.

Currently there is insufficient supply of student accommodation, with only 23% of demand for beds being met by university maintained properties.

Many purpose built buildings are needing fully upgraded, and with several universities short of funding, they are working more and more with private developers who are either building new developments, or refurbishing existing student accommodation.

Knight Frank has reported, through their own independent research, that only 50% of all students in the UK have access to high quality purpose-built student accommodation.

The expansion in student numbers in recent years has led to a far greater demand for accommodation pushing up prices and in turn rental yields.

According to Savills 2010 annual report:

“This should be a buoyant time for the providers of student housing. The number of people trying to secure places at UK universities is at an all time high while the provision of new purpose-built student housing is limited. However, although new beds are estimated to have been delivered at a rate of just one new bed per eight new additional full-time students during 2009, the overall growth in the student population is potentially constrained by future funding restrictions.”

So undoubtedly, there are strong economic factors for investing in student accommodation.

Student Halls are an asset class that previously did not become available to individual investors as frequently with universities tending to purchase units before they were offered to market and landlords not needing to sell due to the high yields.

Student accommodation is seen now as one of the largest untapped and growing real estate markets in Western Europe.

Is this the right time to invest in student accommodation?

According to research by Knight Frank, rentals in this area remain robust with a recorded growth of 5% per annum over the last six years. (compared to 0.6% for commercial property).

Substantially higher growth was achieved in university towns over the past academic year.

Demand for university places rises during recessions and the proportion of students that are returning postgraduates has risen to 24%.

Preliminary figures for the coming academic year already show a significant increase in applications with UCAS reporting a 12% rise at its October deadline.

Students pay rent in advance, and rents increase year on year – and with a management company in place this offers low hassle and high returns!

The four largest student accommodation operators have reported that even with substantial development in the sector the vast majority of students do not have the option of a privately operated room.

As further highlighted by Savills in their annual 2010 report, there is huge demand for private investment in student accommodation currently due to university financial funding issues.

They report, “Reduced funding to the university sector may lead to universities pursuing other methods of funding such as the disposal of assets to the private sector or partnership arrangements with private organisations. 70% of purpose built student housing is owned and managed by universities and this proportion may reduce in the light of lower levels of central government funding.

In addition, according to the Higher Education Funding Council for England (HEFCE) the majority of universities have a high proportion of stock which is dated and in need of investment.

This may act as a catalyst for universities to seek private sector investment. This trend is already evidenced by private student operators pursuing partnerships with universities to renovate and manage existing rundown on-campus accommodation, as higher education institutions struggle to raise capital to fund repairs, maintenance and renovation.

New approaches to enable the delivery of sufficient volumes of stock will be required to meet the demand for student housing, as university funding drifts away.

We have already seen a shift towards the inclusion of purpose-built student housing as a way of releasing viable and affordable residential sites. Innovative joint venture strategies, between universities and the private sector have also helped alleviate barriers to development by creating synergies which reduce risk to all parties while providing high quality accommodation in good locations.”

How do I know what the value is of the student accommodation on offer?

As an asset class and no longer a niche property market, the sector is maturing and becoming recognised as an important element of the wider property investment market.

Valuers and lenders alike recognise this and will put a value on this, just as they will with other investments.

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