Don’t get suckered by student accommodation

There are so many irritating things about the UK property market that it is hard to know where to start with the complaining. But at the moment, the thing that is bothering me most is this idea that we have somehow escaped the kind of property crashes that other bubble markets have had.

We haven’t. House prices across the UK are still down about 20% in inflation-adjusted terms, and there has been a proper crash in the north and in Northern Ireland. But the government flatly refuses to allow house prices to fall to market clearing levels, so a huge number of people still believe that property is, and always will be, the safest investment there is.

If I had a tenner for every reader who asked me to write more often about how to make money out of property, I would no longer have to worry about the price of property. If you see what I mean.

So, to humour you all, I do keep an eye on various parts of the property market just in case, and I do listen to what the endless parade of property bulls have to say about the supposedly easy money that is there for the taking.

At the moment I am hearing a lot about the student property market. It’s a good story. The number of students in the UK is high and rising – up from 1.8 million in the 1990s to more like 2.3 million now.

There was some worry that the high level of fees would put UK students off, but so far they don’t seem to have noticed the change in the risk-reward relationship.

The UK is also a magnet for foreign students, partly due to its reputation for offering high standards and partly to the weak pound – something that makes an English education paid for in an Asian currency look pretty good value. At some of the UK’s top universities, up to 30% of students now come from abroad.

And all those well-heeled foreign folk need somewhere to live. Local authorities and universities would all prefer that they lived in purpose-built student accommodation (or PBSA as the industry likes to say), so that they don’t push up rents elsewhere.

The fact that 20% of the houses in multiple occupation in Brighton are lived in by students is one reason that rents in the city are rising at 7-8% year.

So it appears to make sense to invest in PBSA in top university towns, the ones the students will keep flocking to. You get a stake in the property market, a good income – students appear to have little sense of what is the right price for anything – and the chance of a capital gain too. And you get all that without the bother of having to manage a buy-to-let. So, why wouldn’t you?

There’s a simple answer to that: because you may well get ripped off. The underlying story here is indeed excellent – that’s why the world’s sovereign wealth funds and private equity firms are all over it. But the options for retail investors are not so excellent.

The funds that are available are mostly based offshore, outside the jurisdiction of the UK regulatory system, and come with some shocking layers of fees.

Those in any doubt should amuse themselves by reading the charges and fees section of any one of the funds on offer. I gave up on the Mansion Student Accommodation Fund after a couple of paragraphs: the number of different groups receiving fees of one kind or another addled my brain.

These funds, said one industry participant to me this week, are “very elegant fee harvesting systems”. And the one fund that most of us associate with this sector, the Brandeaux Student Accommodation Fund, has been having what you might politely call liquidity problems for some years now. You can’t get in or out.

The good news is that there is one more option. The bad is that it isn’t quite what we want either. It is fractional ownership. You give the developer £40,000-50,000. You get a student “pod” in a second university city with (typically) a two-year rental guarantee of something like 8%.

You might think that sounds rather nice. I think you are wrong. We’ve been here before. Remember the trend for buying hotel rooms? GuestInvest? I’ve not yet come across anyone who has had long-term success with this.

Buying a pod comes with all the same problems. The rental guarantee is a red herring – it suggests that you might get that rent over the long term, but is just as likely to be paid out of the profit on flogging the unit than from the income on that unit.

Then there are the management charges. You have no control over them at all: what if they triple in year three? And what if you want out in five years? There is no real secondary market in pods – you will find that you are reliant on the people who sold you the pod in the first place to help you get rid of it. It might work, but I can’t say it sounds like much of a deal to me.

So how do you get in? Right now, you don’t.

There is one little fund out there I like. It is the first UK student accommodation real estate investment trust (Reit), it is called GCP Student Living, and its stock market ticker is DIGS – geddit? The problem is that it is small (a mere £70m), and is already trading at a good premium to its net asset value, so it is hard to recommend at the moment.

However, this is the way the industry should be heading, and if any other well-managed investment trusts investing in the sector hit the market, I might actually find myself suggesting you buy them.

• This article was first published in the Financial Times.

  • mr clyde

    Merryn,
    Don’t bother, the risk is miss-priced. In my university city, student property is flatlining and affecting other city rents. Having off-loaded all but my best two apartments (kept for the kids) in 2007, I have seen nothing to tempt me anywhere near the market again and am quite happy to stick to decent global blue-chips with a few aim & small/mid-caps for a bit of excitement.

    • Troy

      Depends how you look at it. Although I would never say blue chips or property is an option. A bit of both makes more sense. However can I see blue chip stocks dropping 30% from here. Well yes. Can I see rents dropping 30 % from here. No.

      • Warun Boofit

        You are comparing property rent to a possible capital loss on equities, you do not expect a correction in property prices ? I agree that a 30% correction in equity markets could happen but its nothing much to worry about. The first crash I experienced was in the early 70s, I now look forward to the excitement of them but in every case they have been blips, blue chip price variation can be 50% a year, we get that every year so a potential 30% market correction why worry, anyone unable to make some positive use of the volatility should not be in the market. Property can be a reasonable investment if you buy it right but buying through one of these schemes is the same as the AIM market maker charging a 30% spread on a penny share, people still buy hoping for a multi bagger but you dont get that in property you may get modest capital appreciation so why pay an inflated price.

  • Warun Boofit

    There are lots of these student ‘schemes’ doing the rounds at the moment, what I dont understand is why anyone would be tempted by an 8% return versus the risk. The ‘investment’ holds as much appeal to me as a time share in Spain and I imagine its probably the same type of people behind them, I would not want those types anywhere near my money. I agree with Mr Clyde blue chips is best, 0.03% spread to get in and same to get out plus £6 each way for commission , the biggest cost is the 0.5% stamp duty which I dont mind as its helping the poor government to run the country.

  • vitilevu

    Merryn,
    Thanks for the article and advice therein. If it looks too good to be true etc.
    Do you see any incongruence in publishing and emailling me this article on the same day I received an email, under the Money Morning banner, from one of these student accommodation schemes ?

  • James P

    I remain a little perplexed as to why some people would “invest” in this relatively risky type of scheme for the 8% (or so) suggested return (and probably less after various fees and charges), unless they believed that there was going to be a significant excess likely from the increased value of their property after many years – if they could actually realise it at the time they wanted to.
    A return of 8% -10% (and sometimes more) is fairly readily available from Peer to Peer lending operations (such as Folk to Folk etc) being fully secured by First Charges on 60% LTVs (max). These loans are extremely liquid with an excellent after-market (easy-in and easy-out); they provide a regular monthly income and have no lender fees or charges – even in the unlikely event of an impaired loan.
    Maybe I’m missing something, but I know where a fair percentage of my investment capital will continue to be invested.

    • Troy

      Not as perplexed as I am to why someone with a 60% LTV and no first charge on their property would pay 8-10% on a peer to peer site.

  • bristoljim

    Take a look at Coral Student Portfolio

  • Oscar Foxtrot

    Overseas students are a significant factor in increasing overall demand for student accommodation, but they will not keep coming to the UK with the growth in overseas branches of European and US universities e.g Sorbonne in the United Arab Emirates and Reading University, Malaysia.
    I could also mention competition withn the EU e.g. in Germany, overseas students are changed the same (low) tuition fees as home students.
    In addition, the courses offered online as part of the MOOCS project (Massive Open Online Courses) will revolutionise higher education.
    Bricks and mortar universities will decline in importance, as will the need for students to physically be close to the learning institution.
    With my own children I am happy to stump up 50k each to put a dent in their university costs but I would also expect them to consider the possibility of an online course or a cheaper EU course and use the balance as a deposit on a house.

  • 4caster

    My brother invested some two decades ago in two houses in Lincoln, unencumbered by mortgages, and has let them ever since to students, three or four in each. They are mostly from the teachers’ training college there, and he has had very little trouble from them. He gets faults repaired promptly, and no-one has ever defaulted on rent. They are better than your usual buy-to-let tenants. The capital uplift has been substantial.
    Direct ownership is best for people who want a steady income akin to a pension, and if he grows old and decrepit he can always employ a letting agent to manage them.

  • Merryn

    @ vitilevu Actually that’s part of the reason I wrote this piece. Not everyone at MW agrees with me on everything and our ads don’t necessarily reflect our editorial views (that would be a tough way to run a business dependent on advertising) so this is simply my view on the market.