Can you make money from student accommodation?

There’s a good seminar on tonight at the Economic Research Council on the future of UK property. Our own James Ferguson is speaking, as is James Wyatt of JD Wood & Co (one of the industry’s rare realists). I think it will be a very interesting evening – I’ll tweet from it and write up any interesting bits and bobs for you tomorrow, but there is still time to get a last minute ticket here.

In the meantime, however, a quick look at student property. It is, says James Pullan of Knight Frank in the FT, “one of the most successful real estate classes thanks to stability of demand for student bedrooms all over the UK”.

The FT goes on to suggest various ways in which you might invest. You could buy a student house and let it out (basically HMO buy-to-let). You could go for a fund such as the UK Real Estate Investment Trust or the Mansion Student Accomodation Fund (the latter is only accessible via an IFA). You could invest in a developer such as Unite Group, the UK’s “largest student housing provider by volume.”

Or, finally, you can just buy a “student pod”. A pod is basically a single room in a student development in a university town such as Leeds, Manchester or Sheffield. You should almost certainly avoid the pods. They are generally very small (say 12-13 square metres) and extremely expensive relative to their local markets.

Another piece in the FT a few days ago made the point that a £59,995 pod currently on the market in Canterbury “costs more than twice the average for the city on a per square foot basis”. You might expect a small premium for the new-build aspect and for any onsite facilities, but a square footage price on a par with SW1? That’s just too much.

The main attraction of the pods has in the past been that they have come with “guaranteed annual returns” – often of around 10%. That’s very tempting in a market where cash provides a negative return after inflation. Unfortunately, the guarantees are often not sustainable (being, as they sometimes are, paid out of the provider’s general revenues rather than real rents) and once the guarantee runs out, the income tends to run out too.

But while the pods themselves are an obvious ‘avoid’, the other options aren’t a money-making given either. There has been a huge amount of development in the UK predicated on the idea that student numbers can only ever rise (a huge development has just gone up at the end of my road, charging more in rent per room than the local cost of a one-bed flat).

But let’s not forget that applications fell nearly 9% in the year that the new tuition fee system was introduced. As increasing numbers of young people notice that the current student loans system really does little more than saddle them with a (high) graduate tax (see my previous posts on this) and that at the low end a degree doesn’t even guarantee them much of a higher income than their non-graduate friends, it will surely fall further. Then who will get a 10% yield from student property?

P.S It isn’t just in the UK that graduates might be beginning to question the wisdom of giving over all that money and time to studying.

According to Leo Lewis, writing in the Times today, getting graduate-level work is just as hard in China – 6.99 million people ail graduate there this year all “into a jobs market that hasn’t quite worked out what to do with them.”

An example of just how hard it can be: the city of Harbin needed 450 cleaners. But graduates want a government job (however low level) so much that 3,000 of them applied alongside 7,000 non-graduates.