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The UK is home to some of the best universities in the world, meaning students domestically and across the globe are constantly looking for accommodation. In 2021, Statista reported there were an estimated 2.75 million students in UK higher education. A huge number of these students are looking for quality accommodation in major towns and cities across the country. In addition to this, The National Student Accommodation Survey found that in 2021, 88% of students were choosing to live in rental accommodation. This has investors questioning whether student accommodation is the best option for them.
However, with a rise in industries and funding across the UK, residential property investors across the country are seeing strong returns and significant capital growth. The supply-demand imbalance has caused property prices to inflate. This means the property market for buy-to-let investors is strong as prices continue to grow. Furthermore, Generation Rent continues to expand intensifying rental demand across the UK. Therefore, investors have a difficult decision, should they invest in student or residential properties?
HMOHome of Multiple Occupants
PBSAPurpose-Built Student Accommodation
Homes of Multiple Occupants
In the past, most landlords have invested in HMOs (homes of multiple occupants). Usually, these are terraced houses where occupants share facilities such as a kitchen, bathroom and living area. Each occupant has a separate bedroom and is liable for their own rental agreement. This means the property yields more, with HMOs yielding an average of 7.5%.
However, according to a Savills report in 2020, a record-breaking £5.77 billion was spent on purpose-built student accommodation causing a fall in demand for HMOs. Now students have more options available to them, they are often looking for quality accommodation in central areas, which is leaving HMOs unable to compete with purpose-built student blocks.
As for management, tenants in HMOs are typically much harder to manage, as there are multiple tenants in each property. Although not always the case, student dropouts, parties and lack of financial experience can sometimes cause a breach in the tenancy agreement. As a result, landlords often struggle to find tenants once the academic year has begun. Additionally, the cost of repairing damage caused by tenants can make a huge dent in any potential return on investment.
To protect some communities from an imbalance they may be under Article 4. HMOs in these areas must obtain planning permission. In some areas such as Leeds, the entirety of the inner city is covered by this legislation. If an investor is looking to convert a house into an HMO, they will need to apply on a case-by-case basis. The result of the application is never possible to predict. If a property already has an HMO licence in an Article 4 area, it is highly likely to cost investors a considerable amount more than identical houses in the same area.
Purpose-Built Student Accommodations
With more centralized locations, modern designs, new facilities and plenty of amenities, purpose-built student accommodations are in high demand. For investors, the low barrier to entry is very appealing. These accommodation types usually have in-house management, security, and maintenance, meaning a more hands-off experience.
When purchasing a PBSA, it is not possible to buy using a mortgage meaning all costs must be paid upfront. Also, when compared to residential properties the capital growth is usually much lower, as they are much harder to sell, even when initially purchased off-plan. As for the in-house management services, it will cost the investor a reoccurring service charge.
The rapidly increasing competition in the market is cause for some concern for PBSA investors. Enhanced competition could see a decline in demand for their property over time. This can cause average rental prices to drop, even if residential rental prices continue to increase.
As previously noted, management for PBSAs is more hands-off. However, the tenants are still inexperienced, and this can cause property wear and tear. Additionally, the tenancy agreements only span the academic year, typically 9-months, leaving the property vacant for 3-months of the year. During this period, landlords are often prohibited from occupying their property with short-term tenancies.
In the UK, rental demand and house prices are on the rise. Investors looking for high investment returns and strong capital growth favour residential properties. A report released by Savills forecasts property prices across the UK will rise by 18.8%, by 2026. This means investors who are looking to add to their portfolio now are going to see higher capital appreciation.
HomeLet reported in their October 2022 Rental Index that average rental prices across the UK are now at £1,171 having risen 10.6% year on year. The increase in rents is caused by the supply-demand imbalance across the UK. An influx of skilled professionals and huge investments made across the country has only strengthened the property market.
However, the issue some investors are facing is a higher bar to entry with a residential property because prices are usually higher than with student accommodation. But with the ability to use a mortgage, investors can stretch the budget further. Another issue investors are facing is finding the right property, with many favouring off-plan new-build apartments with lower maintenance costs, large capital growth with high rental demand in growing areas.
Find out more about investing off-plan, here.
Industry specialists moving to new cities are now more likely to rent, as there has been a huge increase in rental demand in recent years. This is often attributed to the difficulty of first-time buyers getting onto the property ladder, with others desiring to rent as it better fits their lifestyle. These tenants are much more reliable as they have a higher and more stable income and can provide references from previous landlords.
With the increasing number of students in the UK, the rental demand for quality student accommodation is high. However, with service charges, maintenance costs, legal restrictions and increasing volumes of competition, it is a very difficult market to navigate. The difficulty of re-selling the HMO or PBSA down the line is a major disadvantage to investors. This is because there is a reduced chance of seeing a higher return on their capital compared to the returns of residential property investors.
Additionally, the demand for quality accommodation from skilled professionals is high across the UK. With major investments in towns and cities across the country, some areas are seeing huge property price increases. These include Liverpool, Manchester, and Birmingham, with the potential for strong capital growth. There is very little downside to investing in residential property over student accommodation. Right now, the market is perfect for investors looking to start or add to their portfolios.
If you have any questions or would like to enquire about the best options available to you. Feel free to contact CityRise and speak to our property investment consultants, here.
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