Should you invest in student rooms that are off plan?
The feeling we get from investors, whether they are based locally, nationally or from abroad is they can be somewhat more apprehensive of buying into student room investments if it’s off-plan. To the more novice investors, off-plan purchases are properties that do not yet exist in physical form i.e. they are sold on the basis of drawings, plans and floor plans. And this is where the problem lies – especially to those that have either had their fingers burnt on off-plan investments or have read horror stories relating to off-plan developments.
The concept itself is not a new and has been a way in the past for the developer to mitigate his risks as they have confidence that there are already interested parties in the apartments, houses or whatever they may be. In turn, the acquiring party who may have put down a reservation or a deposit on a particular plot will benefit from an agreed discounted amount to what the perceived value of the property will be once it has actually been constructed and has a physical manifestation. In principle, it makes sense as the buyer is taking a risk, but gets a discount. However, coming back to the point, there have been multiple stories in the news of delayed completions, poorly finished properties and in some cases, developments never being finished leaving the buyer with a half finished product. The final scenario has been a natural fallout from the economic crisis and credit crunch since 2008 with a lot of unfinished developments.
Off plan student room investments or conversions?
In the student room investment market, clients are usually pitched with two types of construction:
- Off plan student room investments
- Conversions to student accommodation
As stated at the very beginning, we have found that clients are, for the most part, a bit underwhelmed when the words ‘off-plan’ comes into the mix and we fully understand this. We can see how conversions to student rooms and student pods would appeal more to investors. Let’s break down the reasons why:
- Off plan investments indicate that the buyer would be getting some kind of discount to actual market value once built. Not in a single development that we have seen on the market have we seen any credible support to suggest that a client is buying student rooms or student pods at a ‘discount’. By the very nature of the products, it is hard to estimate what the market demand will be like when it comes to resales as there are no historically available comparisons. The student room investments are being sold against the yield it generates, which we think is acceptable. However, if any developer states that there is a “25% discount” compared to market value, then we suggest you ask them to provide you with a RICS valuation.
- How long will these off plan student rooms take to come into fruition? We have seen anything from 2 years to 4 years which sounds about right. Can you really be bothered to wait 3-4 years to see a net income of £2,000-£3,000? I can understand why an investor loses interest on something that will generate very little income after too long a period – especially with the point mentioned above i.e. no genuine hope for uplift on the property.
- Does the developer have a track record of development or can they provide genuine insurance from the moment the sales patter begins? If they are unable or unwilling to finish off the development is your deposit or reservation money protected? Remember, you make money when you buy, not when you sell – Always ensure all your bases are covered.
- Conversions from offices, mills and warehouses can be seen to be a bit safer for the client as the property shell and structure is already in place. The most expensive and time consuming part of any build is the initial stages of the construction, so in this scenario, we can understand why our clients are generally at ease with conversions than off plan.
- The build out time period for conversions can be anything between 6 months to 18 months. 6 months is not really going to happen unless the developer has got his hand on multiple buzzers, but it is possible to have the internal retrofit done within an 8 month period assuming planning permission is already in place. With a much shorter build period, the client benefits from receiving a rental income much earlier on than an off plan development, meaning the payback period is much shorter.
- Visual and physical. The client can receive photos and videos of the building and can see that it actually exists already. This is especially helpful for out of country investors.
You have so much choice with student pods – don’t get pressure sold!
Even with conversions, clients should demand to see some kind of insurance in place or at the very least, to see that their deposits are protected. It must be said that planning permission is easier to obtain for new build developments than conversions and is generally a ‘cleaner’ transaction for the developer as they can build it out to exact specifications, whereas the conversions will have to incorporate the nooks and crannies that come along with an already existing building.
In summary, with the market ever increasing for student pod and student room investments, you should never be pressured into buying something you don’t feel comfortable with. There are at the time of writing, in the region of 1300 student room investments being offered, so they are not going anywhere fast!