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.