Is Student Property Still a Good Investment?

If you are on a few mailing lists as an active investor, there is a good chance that you may have been offered a chance to invest in one of the student-accommodation schemes available.

The numbers being offered to entice you in certainly look appealing and the prospect of achieving a regular income on your money is always worth a second look, but despite headline offers by some schemes of returns of 9% over five years, is student property still a good investment?

Improvements to college accommodation

if you were a college student from the past, you will probably have cast an envious glance at the quality and range of accommodation available compared to what was considered acceptable in a previous era.

Although a great deal of the private investment in student housing takes place off campus, budget restrictions have led to major universities opening up their mind and their their doors to private investors on campus. These universities have basically been forced to choose between spending what cash they have on academic programs, which leaves the management of living spaces to external resources and investors.

Shiny new apartments and guaranteed tenants do on the face of it make investing in student accommodation something that has some appeal, especially if you are being offered guaranteed income and none of the costs or hassled with running a buy-to-let yourself.

Student Housing REITs have been the popular solution and the sort of campus accommodation that only baby-boomers could dream of, now exists on some sites which offer resort-style swimming pools, tanning salons and a whole host of other leisure activities and facilities.

It seems that right up until we almost reached the new millennium, student housing was largely ignored by property developers, but that situation has created a number of opportunities which have been subsequently exploited by some Student Housing REITs.

In just twenty years, we have gone from an almost total absence of purpose-built student housing to the shiny new and extremely attractive campus environments now being offered to many students today.

Defined target markets

When looking at the investment opportunity that is being offered by the development of student housing of this caliber, it is important to understand that developers are mainly targeting specifically defined target markets with their product.

The stock-exchange listed listed student REITs tend to only invest in schools which have a minimum of 10,000 students, therefore ensuring that there should be healthy demand for their housing.

Investors in student housing need to comprehend the risks attached to a narrowly defined target market. A rise in tuition costs and a growth in online education resources could feasibly slow demand for the student housing.

The counter-argument to suggest that this should not be an issue is the fact that demand still currently exceeds supply and from a competition point of view, obsolete student housing stock is not seen as much of a threat to growth and steady demand.

The market feedback from existing customers, the students themselves, show that there is not a great deal of price sensitivity to contend with. Parents who are already committed to paying about $22,000 a year for tuition and housing, have not so far shown much of an objection to paying about $1,000 more for their offspring to stay in brand new student housing with such excellent leisure facilities to hand.

In terms of the outlook for investors in these REITs, 2013 was a poor year generally with fears of oversupply being one reason for the fall. These fears seem to have been largely unfounded as prices have subsequently risen again and when you consider that the universities need to look to these developments from external developers because of their capital constraints, you could construct a reasonable argument that Student Housing REITs are a growth industry.

If you take the example of Austin in Texas where there is a noticeable abundance of new student housing, occupancy rates have still remained at around 90% overall. So the oversupply fears may well have been overplayed on that basis.

You could certainly construct a reasonable argument to suggest that there is a potential upside in student property, especially in the case of the REITs currently available, but you should make your own mind up about the risks such as oversupply and the threat of online education having an impact on the number of students attending universities and using these attractive housing facilities.

Modest entry level for direct investment in student property

If you want an alternative to a Student Housing REIT, there is of course the chance to invest directly in buying units within a student housing development. Overseas investors have been attracted to the UK in this respect, with the quality of education in the country seen as a positive aspect as well as the potential of the UK housing market in general.

Looking at the UK university accommodation market for example and a development in the established university city of Sheffield, you could make an investment of $60k/£40k in return for a guaranteed rental return and the sourcing of tenants and management of the property all taken care as part of the package.

Spectrum Apartments in Sheffield offered investors returns of 8.9% over five years and you can find other schemes like Vita Student, who have properties around the UK and promised investors as much as 35% net return over the same five year period.

Where’s the catch?

These sort of returns and guarantees seem to make investing in student accommodation a seemingly viable and attractive investment proposition.

There are always caveats that you need to consider and some of these deals are no different.

The first obvious drawback is that you will probably have to commit the cash to the deal rather than obtain mortgage finance. This is a bit of a warning bell in itself, as most standard buy-to-let lenders won’t finance this type of investment because of the perceived quality of the tenancy and also the potential re-saleability of the units.

if you are being asked to invest off-plan, you are also taking a development risk as there is the prospect, however remote, that the developer may not finish the block or subsequently have the experience to manage it successfully.

Rental guarantees

Guaranteed rent is an attractive proposition for investors but there are some sceptics who believe that investors are simply subsiding their own rental guarantees by paying an inflated price for the unit in the first place.

There have also been a number of student pod schemes for example, where the guaranteed rents have ceased shortly after completion of the development and investors have then discovered to their cost, that the real market rents they are able to secure are actually lower than they they anticipated.

Getting out

As with most investments, you need to consider your exit strategy and investigate how easy it is to sell and move on when you want to, and at what cost.

A traditional buy-to-let opportunity will generally offer you ample opportunity to sell your property on to a readymade market such as first-time buyers or other investors.

There is a possibility that these specific student schemes have limited buyer appeal, or you could buy into a scheme that proves popular and you manage to find someone who is willing to buy you out and take your place.

The point is, that this more specialist buy-to-let investment opportunity may not be all that it seems or promises. It has to be said that there are undoubtedly schemes that will deliver and provide you with the sort of return on your investment that you are looking for, but in answer to the original question as to whether student property is still a good investment, the answer depends on your risk profile and whether you understand and agree to all the terms of the deal you are being offered.

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Elizabeth Goldman is the editor of AlternativeInvestmentCoach.com. She has written for Investing.com, Bullbearings.com and many others.