The former niche asset class of student property has developed a reputation as one of the UK’s top-performing investments over the past few years. This has resulted in a rapid increase in demand from investors, with total investment in the student accommodation sector predicted to reach £2 billion by the time 2015 arrives. But one of the most basic rules of investment is that higher returns usually come hand-in-hand with bigger risks. What are the risks of student property investment, and how do they stack up against the rewards?
One of the key rewards of student property investment is the comparatively high average level of returns. At around 13.7% this year according to forecasts from Savills, student properties have the potential to be much more lucrative than the average buy-to-let investment.
Several factors are behind the current strength of the student property sector. Part of it is simple supply and demand. Student numbers are increasing every year, both through growing numbers of domestic applications and the UK’s increasing popularity with international students. On the other hand, the number of available beds is not increasing at the same rate. As the market is already strained, and particularly lacking in good-quality accommodation, this is creating very high demand which means that student properties are easier to fill and can command higher rents.
One key section of the market that is experiencing particularly high investor demand is dedicated student developments. Investors can buy student units or “pods” within such developments at relatively low prices, which helps to make the market more accessible with lower outlays. This type of accommodation is increasingly popular as students seek out higher living standards and tends to come fully managed, minimising the time and effort the investor must put in. Often, returns are guaranteed for a certain period after purchase, and afterwards are earned through rent as with any other investment.
Student property investments certainly have some attractive rewards, but unsurprisingly these do not come without risks. Dedicated student units can seem the most attractive of all, but they are often sold off-plan in order to raise funds for development. This does not necessarily represent a bad opportunity, but it does create extra risks which must be understood before purchase. Sometimes investors are somewhat compensated for this added risk through the payment of interest on their investment during the build process.
It is also important to look into the developer. Do they have assets to back the development, or are they relying solely on investor funds? Do they have a good track record in this sector? Do they have the necessary expertise to manage the build upon completion? Are they using reliable contractors? All these questions will help you assess the risks associated with a particular opportunity.
Certain things can be done to manage the risk. For example, putting funds into a solicitor’s account for release at agreed milestones can help give you added financial protection should problems arise during the process.
POSTED BY DANIEL PEACOCK for www.propertysecrets.net