by Tim on February 14, 2010
By Tim Watts,
Tim Watts
Rising student numbers, consistent annual rental growth and an ever increasing appetite from institutions all bodes well for strong performance in this sector but is it really that easy? Past experience has taught me that when someone tells me it’s easy they have either been exceptionally lucky or really don’t know what they are talking about and are completely fee driven. The private development of student accommodation is a relatively new phenomenon and would appear to provide an excellent investment opportunity which is particularly resilient in more challenging economic times.
forecasts look good
However, universities are starting to slash places as the government funding squeeze starts to take effect. You like me probably thought that education and the Health Service were not forming part of future government’s reductions in spending plans. I wonder what part of the Health Service in due course the government feel is not part of the Health Service! It should also be remembered that this is only the beginning of far greater cuts that will be necessary in order to help reduce the UK’s public borrowing deficit. So perhaps those successful in investing in this sector will need to undertake a stricter due diligence process before proceeding to the acquisition stage.
For me any acquisition has to tick the following four boxes before further consideration would be given to the proposition:
- The quality of the university
- Location of accommodation to the university and social environment
- International student population
- Supply and quality of existing and anticipated accommodation
These four key considerations should not be considered independently of each other and as this investment sector changes and develops so does the weighting that one should attribute to these four considerations. For example the supply and quality of existing accommodation would not have been an issue in almost every University town less than ten years ago. Now, however, in certain areas not all student accommodation will let, and the requirements of what the student is expecting continue to evolve.
overseas student
In my view the trend in overseas students for a particular university town should now be the key driver. If one takes the view that there is likely to be a continued squeeze on places it is important to remember that there are no restrictions on the number of international students. Whilst there is a cap on British undergraduate fees of £3,225 there is no cap on fees for those outside the European Union. Quite why the British tax payer is subsidising members of the European Union when British applicants are being turned away is not a topic for discussion here but I am sure one for the Daily Mail.
By focusing on this trend and being alert to the requirements of accommodation for the international student there is every reason to remain optimistic that the student investment sector should continue to perform well. For example, with Government forecasts indicating a further 125,000 international students over the next decade it is easy to see why London continues to offer investment opportunities. However one final word of caution. Just as the bubble burst in the commercial market partly due to the weight of money, there is a point, as with all investment decisions, where the answer should be “no” rather than the ridiculous get out clause of acquisition due to the need to balance a portfolio.
by Martin on February 7, 2010
By Martin Skinner
A love affair – my story
I’ve been a passionate advocate of residential property investment particularly in London since I bought my first investment property out in the far reaches of London’s Docklands in 2002. My love affair with residential began much earlier though…
I spent my formative years from 7-18 growing up in a big house on 3/4 of an acre of land in East Sussex. My parents had settled there after many years of travelling and teaching in far off places like Uganda & the Solomon Islands, where I was born. It wasn’t a particularly expensive house or in a particularly expensive area but it had a big garden, big trees, a gravel driveway and a garage big enough to play table-tennis & snooker in. And I had a bigger bedroom than I remember any of my friends having – so they often came to my place – I loved it ! An Englishman’s home is his castle and I didn’t have to pay any rent…
… until I moved up to London for university in 1998 and had to pay rent. From 11 years old onwards I’d always worked to earn extra money to pay for extra toys – first skateboards, then bikes and finally sports cars – and I really didn’t enjoy having to throw a whole £300 a month away on something I’d always enjoyed for free. Have you any idea how much faster I could make my car go for £3,600 (12 months’ rent)?? My parents didn’t seem to share my pain. “I could buy a 3-bed ex-council flat, rent out the spare rooms to friends and live rent free if only you’d guarantee the mortgage” I explained. Mum would have helped but my dad, who was a tough old sod from an army background, threatened to divorce her and move out if she took such a huge risk on me. And then my car got stolen.
Anyway, as soon as I had the salary to support it without a parental guarantee I bought my first 3-bedroom house. I paid £220,000 for it in March 2002; quickly knocked the kitchen into the dining room to free up an extra bedroom and let the 3 rooms out. I received enough rental income to pay the mortgage, all the bills and still left me with £500 a month (and my own bedroom). I then re-mortgaged it for £70,000 extra just six months later. It would have taken me at least 10 years to save up that much money from my £34,000 a year job and I was convinced; this was how I would earn my money.
Institutions – still flirting
Meanwhile institutional investors rarely share the passion I have for the sector and consistently struggle to get their products beyond first base. A number of large UK institutions announced their intentions to invest last year but almost a year on they still haven’t got them off the ground. The main reasons appear to be:
- More active management required
- The recent rebound in market values
- Lower net yields compared with commercial
- Short-term tenancies (longer-dated income is preferred)
- Reluctance from banks to release large volumes of discounted stock
In addition to this many financial advisors struggle to differentiate between an investor (or client)’s home and their investment portfolio and therefore look to diversify into commercial property over residential alternatives.
These are not insurmountable challenges however and some including Invista Real Estate and Inspired Asset Management (who I advise) with their Urban Share Fund are succeeding with their products.
Why not just stick with commercial property?
Assets are generally valued based on multiple of their current and future income (in this case net rental yields). And rents are still under downward pressure for offices, industrial and in particular retail where sheer weight of money meant more space was developed. Combined with changing consumer and occupier behaviour (online shopping for example) the recovery in commercial property is likely to be much more muted.
In residential meanwhile there was a housing supply shortage/crisis before the downturn even began. The demand pressure is building and the supply-side is hamstrung. National house builders had to shrink their businesses to survive the recession and could take 5 years to get back to where they were in 2007 and smaller developers cannot raise the development finance they need to produce new stock.
Hybrid variants of residential including affordable housing and student accommodation are attracting more attention from investment funds but even they are both still in short supply; particularly in London where according to Savills student numbers are growing at 15 times the rate of new supply. London is also where waiting lists for council housing have reached such extreme levels that dedicated workforces are being recruited to persuade those on the lists to look to the private sector for help. Private landlords of course prefer to steer well clear of tenants on housing benefit after suffering huge losses when the government diverted payments from landlords to tenants who then frequently failed to pass them on.
Anecdotal evidence from West London agents suggests rents are increasing again and at quite a pace. Knight Frank is forecasting house price increases of 34% in London over the next 5 years. The Centre for Economics and Business Research (CEBR) expects prices in the UK as a whole to rise by 20% over the next 3 years as banks step up lending and interest rates remain low.
Historically residential property has proven to be a relatively safe asset class hence the expression ‘as safe as houses’ and:
- outperformed other asset classes
- offered higher income yields than bonds
- offered an effective hedge against inflation
Whether the powerful few step up their investment programmes in Residential Property or not it’s clear that in the years ahead many students and young graduates are going to have a much harder time finding accommodation they can afford to rent let alone buy.
If you would like to learn more and/or discuss some of the pressing issues faced by our next generation please book your tickets for our University Challenge event. We will be hosting a discussion involving fund managers, property managers and students at the May Fair Hotel in London from 6.30pm on Thursday the 11th February. The last few tickets are available now on http://inspired.eventbrite.com.
