Lim Yin Foong: UK's student-housing sector delivering strong returns

LIKE MANY OF her peers, Rachel, 18, is excited yet nervous as she embarks on the adventure of a lifetime this week; starting university.

As she leaves home and moves into student accommodation in her university town two hours away, she will experience her first taste of adult life, and will have to deal with responsibilities such as paying the rent on time.

 

Rachel will, however, have to pay higher rent for her accommodation this year. The current average student rent in the UK has gone up 3% over the last year to £67.11 ($133.64) a week, research conducted by search engine accommodationforstudents. com shows. Those studying in London will pay even more as the average weekly rent has risen 5% to £108.03.

 

While this is painful for students — and their parents footing the bill — particularly in the current economic climate, higher rents has meant better yields for property investors. Property consultancy CB Richard Ellis has found that student-accommodation investments are generating attractive yields of between 5.25% and 7%, depending on location and leasing agreement.

 

The investment potential of the UK student- housing sector is undeniable. University intake in the UK is at an all-time high, as the economic downturn and high unemployment levels have seen more young people attending university. Universities and Colleges Admissions Service (UCAS) figures show that as at Sept 19, a total of 485,738 applicants had accepted a place at a UK university, compared with the previous year’s 475,520. 

 

A significant 20% increase in student numbers over the past 10 years has resulted in a huge shortage of housing supply by institutions of higher education, says Savills. In its Spotlight on Student Housing report, the property consultancy is confident that the sector will continue to deliver strong returns compared with other mainstream asset classes.

 

London, in particular, with 40 higher-education institutions and an estimated 291,815 full-time students for the 2011 academic year, has been identified by estate agents and property consultants as the top location for student- housing investment. A significant shortage of supply — only 15.4% of students live in university-owned accommodation, according to estate agent Knight Frank — means there is huge demand for private student accommodation. 

 

This has given rise to more development projects; Drivers Jonas Deloitte’s latest London Student Housing Crane Survey records 21 schemes under construction, compared with 11 in 2010. Development of high-quality student housing schemes, in particular, has continued to grow, and this has been attributed to the high demand for places at educational institutions in the capital city from wealthier foreign students, who are more likely to take up premium accommodation.

 

Some market observers are confident that even the impending increase in local tuition fees to up to £9,000 per annum (from the current £3,000) for the 2012 academic year will not adversely impact the student-housing sector. Instead, student accommodation will play an important role in the overall university experience as students become more discerning and expect higher standards, and this could result in upward pressure on rents, Property Wire reports.

 

Others are more cautious, believing that the fee hikes would have an effect on how students select their university and courses, which in turn will impact individual institutions and locations. This, coupled with the public funding cuts for universities as proposed under last year’s Browne Review, has increased the downside risks as the outlook of every institution will vary significantly, Savills says in its report.

 

Savills believes that, as a result of this, the university-housing market will become more polarised over the next decade. Student property in “first class locations” — where universities are able to secure alternative funding and attract students, and there is a low existing supply of student housing — will continue to perform well, while those near less-popular universities and where housing supply is high will become less viable.

 

Simon Thompson, co-founder and director of accommodationforstudents.com believes that the popularity of some universities — such as Exeter, Warwick, Edinburgh and Manchester — has put pressure on the accommodation available and hence, pushed rents higher. Knight Frank’s Liam Bailey also believes there are opportunities in locations where universities are seeing the most growth in terms of student numbers; other than London, these include Manchester, Oxford and Cambridge.

 

Savvy property investors are already getting in on the act, and research from CB Richard Ellis show that investors have committed nearly £348 million to this sector since early 2011. More and more British parents are also buying property for their children at university, viewing it as a long-term investment that can generate a steady income stream from other students and even capital growth, long after their own children have graduated, the Evening Standard reports.

 

Prospective investors considering student housing should do well, however, to look beyond the attractive student numbers and choose their location and property wisely.