Should you invest in student digs?

published 9 September 2014

As the number of new university studentsreaches record levels, you might think thatinvesting in property aimed at studentsis a no-brainer.After all, the demand isclearly there, and you might also makea decent capital gain if property pricescontinue to rise. However, investing instudent property is actually quite risky.

One popular scheme involves buyingfractional ownership' in a development.You pay around £50,000 to a developerand in return you get a pod' in a studentblock with a short-term rental guarantee.Under this arrangement, a managementcompany takes care of letting the podsand the day-to-day running of thedevelopment, in return for a fee.

However, you almost certainly won't beable to get a mortgage for a fractionalinvestment. And, on top of that, manymanagement companies have troublefilling their buildings. As a result, returnstend to nosedive once the guaranteeperiod has ended, while management feesoften increase rapidly.

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What's more, itcan be very hard to sell your investment.There have even been a number of caseswhere the managementcompany has collapsed,forcing owners to take amore hands-on approachthan they had expected.This type of investment israrely worthwhile.

A second option is abuy-to-let investment ina student area. In otherwords, you buy a normalhouse or flat. As well asbeing much more flexibleand liquid, this kind ofinvestment may be eligible for a mortgage.

The downside is that it entails a lot moreresponsibility for the owner. Moreover,students have become more demanding,and are increasingly willing to assert theirrights as tenants (especially over deposits).

With interest rates due to go up soon,you need to invest in property with a highenough yield to offset mortgage payments.One area to avoid is central London,with yields as low as 3%, according tosome measures.

However, outside thecapital, yields are higher. Oxford rentshave benefited from both the demandcreated by the university, and a rise in thenumber of London commuters looking formore affordable housing. As a result, theaverage yield is 7%.

If the idea of buying and managingindividual properties seems unattractive,GCP Student Living (LSE: DIGS) is areal-estate investment trust that is focusedon dedicated student accommodation. Atthe moment it has a solid yield of 5.7%and trades at only a slight premium to itsnet asset value.

The problem is that mostof its investments are located in London.As a result, we'd suggest that it might beworth waiting to pick it up when Londonproperty values have fallen back a bit.

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri