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STUDENT FLATS? THINK TWICE!

No free lunch
Look there is no such thing as a free lunch, anywhere. So when I see purpose-built student accommodation (PBSA) being advertised on the basis of a tasty yield for a good number of years I have always been inclined to run a mile. If there is strong demand for a product there is no need to wrap it up in a generous-looking wrapper. THE VERY PACKAGING TELLS ME SOMETHING IS NOT RIGHT.

A few months ago I had my long held suspicions confirmed when I learnt that a major property agent based in the North West – one that makes a living packaging rental properties for investors – is on record as saying that they would never take on PBSA to sell to their clients since they are such an awful deal for buyers.

The enticing yield typically offered is paid for in the inflated asking prices and the agent went so far as to the say that they would never sell such packages even though they offered them some of the highest commission they could secure anywhere. Astonishing – a property agent with admirable ethical principles!

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It is not only the risk of the price being artificially inflated, PBSA units have other risk factors:

1 – the yield/income ‘guarantees’ offered may not be worth the paper they are printed on;

2 – where gross yields are quoted, account needs to taken of management and other charges which can eat deeply into gross yields;

3 – there is no certainty that past increases in student numbers (demand) will continue

4 – lenders will not normally lend on units, meaning only cash-buyers can buy.

Brexit and a hardening stance to immigration could put off foreign students and critically cut demand for student accommodation.

IN SOME TOWNS THERE ARE REAL SIGNS OF OVER-SUPPLY. If that is so, some blocks will find it harder to attract students and rents can be expected to fall in the process.

Some units:

  • could be compelled to cut rents (therefore reducing yields)
  • may have to lie empty for long periods.

Restricted opportunity to exit

When investing in property, a fundamental rule is to have a good exit strategy if things go wrong. But the opportunity to exit in the case of PBSA is often restricted.

The opportunity to exit, never mind exit fast, is restricted since units – if not mortgageable – can only be sold to cash buyers, who are likely to strike a hard bargain and want a significant discount in price. Of course, if the owner of the block is contractually bound or is willing to buy back units, that problem is reduced.

The absence of the full range of likely buyers could depress capital growth of PBSA units in the future. Having said that, I would be disingenuous to suggest that PBSA units have not experienced a healthy growth in recent years in some university towns.

In Liverpool I have noticed that asking prices at least have gone up by around 40% over the last 6 or 7 years. However, when I asked one agent about the resale prospects of PBSA he was distinctly tight-lipped.

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In nearby Preston I recently saw one large PBSA unit going up for sale at auction, a possible indication that the seller could not find a buyer or secure an acceptable price on the open market.

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For me a massive negative with PBSA is the inability to benefit from the holy grail of property development – ‘gearing’ or borrowing to invest. Lenders will not usually lend on PBSA units.

BY BUYING FOR CASH, BUYERS ARE NOT SPREADING THEIR MONEY AS FAR AS IT COULD GO.

Say you had £60,000 cash to invest in a PBSA unit and was promised a 7% gross yield of £4,200 per year (£350 per month). Say instead of buying the PBSA unit, you used the £60,000 to buy three buy-to-let units with a 75% interest only mortgage and paying a deposit of £15,000 in each case – total £45,000 – leaving you with £15,000 in cash.

For instance, paying interest at 4% (£150 per month per property) and securing rent of £350 per property would result in a net of mortgage income of £200 x 12 x 3, namely £7,200 per year. That compares very favourably to the £4,200 per year you would get from the PBSA unit .


In addition, you would still have a chunky slice of your £15,000 in cash – even after you have paid for additional costs of purchase such as mortgage, valuation and legal fees


 

Student units are typically packaged to look like fool-proof property investments – but on closer inspection they could well be the property investment equivalent of fool’s gold.

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Dalton Barrett
Rebel Property Coach

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