Luxury student accommodation investments – where is the value?

We have often struggled with the concept of the self termed luxury investments, especially in target markets that don’t necessitate such descriptions and for the most part, we believe the student investment sector falls under this. We agree that the quality of student accommodation has improved and there is a growing need to fulfill the criteria to those looking for better quality. We also accept that the marketing of luxury and very high end units garner more success in the far east and the investors that are based there. However, when it comes to the crunch, what price are you paying for luxury student accommodation investments? Do you genuinely believe and forecast that your single bedroom will go up in value once you have acquired it for £75,000 to £100,000. When we mention these prices here, we talk of outside Greater London. Do you genuinely find good value in luxury when it comes to putting your capital into such a small floor space? With this sub-sector of student investments, either investors are cottoning on to a lucrative and growing success story or a bubble is forming.

What about the yield on such student accommodation investments?

Yes, you may get the now obligatory 3, 4 or 5 year ‘rent guarantee’, but in every single case we are aware of (including the ones we have promoted in the past), the yield is guaranteed by the company only. We accept the argument that this can be said to be guaranteed through a ‘researched business model’, but as we saw in 2013, two high profile student developers operating in the same market went under despite assurances of a sound and grounded business model.

On a broader scale, such assurances occurred during the 2007-2008 recession whereby a lot of off-plan developments promised the same thing and then disappeared overnight. What happens to the promise then?

The rental guarantee needs to be legally backed, otherwise it’s a promise and promises are regularly broken. For example, the money in your current account is backed by the FCA Insurance scheme, which means that up to £85,000 the money in your current account will be safe if the bank goes under. That is underwritten and is clad iron safe. In these scenarios, it’s just a promise without any legal conditions attached.

One must also look beyond the 2 year, 3 year or five year rent guarantee to see what lays ahead when you are out alone without this ‘guarantee’. You will be left with whatever remains from the rent minus the management and service charge. If you’ve already paid a hefty price for your student pod or student room investment, then what are the chances of being able to offer a reasonable rental yield on the sale at a price where you make some capital gains?

The Service and Management Charge

We have seen in some instances where the service charge amounts to just over £2,500 per annum for one of these student pods. This is an incredible amount on a room measuring between 15m2 to 20m2 and we are dumbfounded as to why an investor would accept such levels of service charge on an investment. This equates to over £200 per month on service charge alone. Even on this aspect alone, the buyers of such high priced and luxury student pods will struggle to offload it to the secondary market, should the need arise.

Look at the numbers beyond the rental guarantee

For example, we received an email about a brand new student development outside of Greater London being offered for £78,000 per room. The room measures 18m2, which means the investor is paying £4,333 per sq.m. A quick look on Rightmove shows that the average price per sq. m on 1 and 2 bed flats is £3,200 per sq. m. – You’re already overpaying from the beginning. The guaranteed yield offered for the first 3 years is 8%. We are giving them the benefit of doubt and assuming this is a net yield, amounting to a net return of £6,240 per annum. However, and this is key, they are claiming that after year 3, there will be a service charge of £2,500 per annum. This means that from year 0 to year 3, the total gross income must be £8740. We will be easy going and say that the bill accrued by each student pod will be £30 a month (factoring in utilities), which totals £360 per annum. Adding all this together in order to achieve a true net yield of 8% per annum means the total rent per year amounts to £9,100 per academic year. Based on a generous 48 week per year, the student will be paying £189.50 per week.

It’s not going to happen! Simple as that. It may happen initially and sales people will argue that current asking prices in the lcoal market are around that price, but comparable asking prices are different to what the payable rate is. For example, I could have a house that I wish to sell for £180,000 and list it on Rightmove for that amount. However, if houses on the same street are selling for £140,000, it doesn’t matter how much I scream and shout that my house is worth £180,000, I won’t be able to sell it. The tru payable market rate is £140,000. We can  all project as much as we like what things will be like, but what matters is how much the market pays right now. If it is an upward incline in rents from this day forward, then that is great, but what matters today is what I will genuinely and realistically achieve.

The bottom line is that luxury student accommodation investments should be abbreviated to just luxury student accommodation. The ‘investments’ part should be omitted.