Kick Start Your New Year with London Property in the “Best Performing Sector”

Student accommodation is an ideal, secure, Maximum Income investment and has been named “the best performing UK property investment sector” by Knight Frank*. With typical assured yields of around 9% (or even, in some cases, 10%!) NET and the high quality of bespoke builds boosting capital growth, we totally agree!

Download our latest, London student accommodation Investment Guide right away, read our London investment blog for more on investing in the capital, or read on to discover how this investment class works for you.

“A critical component of a balanced investment portfolio”

James Pullen, head of student property for Knight Frank, explains: “Total returns for student accommodation in the regions outperformed all other property sectors. The student accommodation sector is now recognised as forming a critical component of a balanced investment portfolio.”

This strong performance is being driven by the imbalance of supply and demand, caused by record applications for university places. UCAS data shows there were nearly 700,000 university applications in 2010, which is 210,000 more than the actual number of undergraduate places available! A reported 600,000 students applied for the 2011 / 2012 academic year, in an ‘application race’ with students motivated to secure their places before the rise in fees in September 2012.

Social economic factors lead to growing demand for luxury accommodation

An additional factor to this boom comes from overseas students, particularly those with wealthy parents. Savvy parents are keen to purchase high-quality accommodation for the term of their children’s education - and hold it as an investment moving forwards. This is particularly prominent in prime university cities and London is the most attractive of all.

This new angle and, in fact, the increasing popularity of bespoke student accommodation builds, is created by the widening social-economic background of both national and international students. Thirty or forty years ago, the Government paid for higher education (with grants) and students took whatever living quarters they could find. Now, with record applications and more personal finance invested in education, there is a growing demand for luxury accommodation.

Education sector welcomes development

The education sector also strongly supports the increasing popularity of this investment class. A letter from a leading college in Greenwich, London, to a specialist student accommodation developer working in the locale, states: “Further to our telephone conversation, I can confirm we do have demand within Greenwich for bespoke, modern and purpose-built student accommodation; specifically in the area your new development will be located. We believe the student market in London, and certainly Greenwich, is strong and should attract investment. We would therefore welcome your proposal to provide quality student accommodation in Greenwich.”

So how does this investment sector work?

Firstly, such developments are almost always off plan. This means traditional mortgage finance is not suitable for such developments. Even when built, traditional finance is difficult to obtain as there is a requirement for studio-style property to be in excess of 30 or 35 square metres (which is larger than typical student accommodation rooms, typically in the region of 12 to 25 square metres).

However, in the absence of funding, investor cash requirements are typically staggered in accordance with the development process. Additionally, you can expect your rental income to be assured at a set figure for the first 12 months following completion (whether the units are tenanted or not!). An assured and high-yielding income makes this kind of proposition very attractive to investors – especially when the development is in a prime locale (which they often are)!

Another benefit is the waiving of agent finder’s fees on such deals. Typically, the developer will retain a small number of select agents to promote and sell the deal. This means the agent is paid directly by the developer, thus passing on the saving to the investor.

The stages are as follows:

Stage one: reservation and planning permission
Before releasing the investment opportunity, the developer will have achieved a planning decision in principle and will start receiving reservations. Reservation fees vary depending upon the price point/s of the units, but you can expect circa £2,000 to £3,000 for units in the £50,000 price point range and £5,000 for units in the £80,000 range. This reservation fee is deducted from the total purchase cost and is refundable if, for any reason, planning permission is not granted.

Stages two and three: exchange and completion and construction
Upon confirmation of planning permission being granted, you will pay a percentage of the total purchase price. This is held by the developer’s solicitor and is only disbursed to the contractor for the build upon the project architect’s instruction and in accordance with the pre-agreed building works schedule. As such, your money is safeguarded at this stage as well.

Stage four: certificate of completion and beginning of unit rental
Upon completion, you will pay the remainder of the balance and the unit/s will be let. Even if construction and/or tenancy are delayed beyond the pre-agreed completion date, the developer still assures your rental income for the first 12 months, as from that pre-agreed date. Again, your investment is safeguarded at this stage.

A safe and profitable investment for ALL portfolios

Investors without a stash of ready cash can also add student accommodation to your portfolios. How? By raising the cash required through a means other than traditional financing. There are multiple ways to do this and I cover them in my Raising Cash for Property Investment articles, as serialised in Your Property Network magazine.

So, contact our dedicated UK portfolio manager, Zoe Bryant, today and add this “critical component” to your own investment portfolio.

*The Knight Frank Property Index is the only investment index in the sector which demonstrates investment performance of this specialist class.