More reasons to stay out of student accommodation

Here is yet more evidence that investors should steer clear of student accommodation, despite how attractive it may seem on the surface.

I wrote last week that student accommodation looks like a great investment - but one in which you absolutely must not invest. That view has been borne out nicely in the few days since.

Knight Frank has released a report into the market that tells us all sorts of wonderful things about the money to be made. There is, says the report, "demonstrable undersupply", something that is most pronounced in Edinburgh, London, Newcastle and Bristol, driven in part by high and rising demand for purpose built student accommodation (PBSA) from overseas students.

The sector has also produced positive rental growth through every year of the economic downturn that suggests an "extraordinary resilience" in the context of the recent introduction of tuition fees.

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What's it all about? Apparently, students are "choosing accommodation for reasons beyond just price." Where they get the money to care about things beyond just price might be a mystery. But nonetheless, they are "demanding clever design that allows social groups to form and bond; such as placing kitchens and lounges at the heart of the design and not despatched to the ends of corridors. Likewise, they are demanding services that create wider social interaction; such as events and private activities, all of which adds to their experience." The result is that PBSA rents are up to 75% higher than HMO rents. It is tempting stuff.

However, in yet another sign that the funds available to investors simply aren't up to the job, the £282m Mansion Student Accommodation Fund has been suspended, thanks, says the FT, to the fact that "it does not have the cash required to satisfy all of the redemption requests made by investors." You can't put new money in (should you be fool enough to want to) and you can't take your old money out.

Brandeaux, the market's other big name fund, did the same to all eight of its funds the Student Accommodation Fund being one of them back in July.

The cynical might wonder why there is such a problem with liquidity in a seemingly successful market. Look closer and you might find that these were high-commission-paying funds so the advent of the RDR, which banned commission payments to IFAs, has surely had a nasty effect on the volume of incoming funds.

However, that doesn't explain why the funds haven't been able to sell properties in order to repay investors who want out. There seems no shortage of demand in the market the sale of this portfolio of student accommodation to a US buyer didn't seem particularly tricky and I even know of big investors in the market looking to buy this stuff.

Could it be not that there aren't buyers, but that there aren't buyers at the prices the funds need to keep their performance figures looking good and the management fees rolling in?

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.