As the number of new university students reaches record levels, you might think that investing in property aimed at students is a no-brainer. After all, the demand is clearly there, and you might also make a decent capital gain if property prices continue to rise. However, investing in student property is actually quite risky.
One popular scheme involves buying ‘fractional ownership’ in a development. You pay around £50,000 to a developer and in return you get a ‘pod’ in a student block with a short-term rental guarantee. Under this arrangement, a management company takes care of letting the pods and the day-to-day running of the development, in return for a fee.
However, you almost certainly won’t be able to get a mortgage for a fractional investment. And, on top of that, many management companies have trouble filling their buildings. As a result, returns tend to nosedive once the guarantee period has ended, while management fees often increase rapidly.
What’s more, it can be very hard to sell your investment. There have even been a number of cases where the management company has collapsed, forcing owners to take a more hands-on approach than they had expected. This type of investment is rarely worthwhile.
A second option is a buy-to-let investment in a student area. In other words, you buy a normal house or flat. As well as being much more flexible and liquid, this kind of investment may be eligible for a mortgage.
The downside is that it entails a lot more responsibility for the owner. Moreover, students have become more demanding, and are increasingly willing to assert their rights as tenants (especially over deposits).
With interest rates due to go up soon, you need to invest in property with a high enough yield to offset mortgage payments. One area to avoid is central London, with yields as low as 3%, according to some measures.
However, outside the capital, yields are higher. Oxford rents have benefited from both the demand created by the university, and a rise in the number of London commuters looking for more affordable housing. As a result, the average yield is 7%.
If the idea of buying and managing individual properties seems unattractive, GCP Student Living (LSE: DIGS) is a real-estate investment trust that is focused on dedicated student accommodation. At the moment it has a solid yield of 5.7% and trades at only a slight premium to its net asset value.
The problem is that most of its investments are located in London. As a result, we’d suggest that it might be worth waiting to pick it up when London property values have fallen back a bit.