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The lure of a prestigious UK degree sees hundreds of thousands of foreign students making a beeline for the British Isles each year. Not surprisingly, demand for student accommodation remains strong, translating into good returns for those investing in properties targeting this group.
Student accommodation is one asset class that has performed well despite the economic hiccups that Europe has been experiencing of late. This demographic’s investment potential is evident from the statistics gleaned from the UK Council for International Student Affairs (UKCISA). In 2010/11, 428,225 international students from the EU as well as non-EU countries were accepted into institutions of higher learning, an increase of 6% from the 405,810 in 2009/10.
This number is set to increase as universities will no longer be receiving public support for courses in arts, humanities and social science as well as 80% of their teaching budgets, as outlined by The Browne Review on remodelling the UK higher education system.
As a result, universities would need to attract higher-paying students, that is, those from abroad, as a source of funding.
According to CB Richard Ellis (CBRE) 4Q2011 Student Accommodation Viewpoint report, universities across England anticipate applications from overseas students increasing by an average 3% to 6%, with some even seeing income from this group rising by 100% by 2013/14.
According to Savills Research’s Autumn 2011 report Spotlight on Student Housing, the increase in student numbers by 20% in the last 10 years “has left higher education establishments very short of accommodation — even for first-year undergraduates”. As a result, “time is ripe for stock transfer to take place from universities to private sector owners”.
High returns in London
Consequently, investors can expect handsome returns. According to Knight Frank’s Residential Research Student Property 2012 report, total returns for investors in September 2011 were the highest in London. “The Knight Frank Student Property Index shows total returns for student property investors have nearly doubled. Returns in the capital climbed to 15.1% in September 2011, up from 8.4% in the previous year,” the report said.
The top five places to invest in student property in the UK are London, Kingston, Brighton, Edinburgh and Durham. The rankings are based on the supply of student property, number of university places and quality of university.
London has 46 universities, colleges and schools. The top five, according to The Complete University Guide website, are Imperial College London, London School of Economics, University College London, King’s College London and The School of Oriental and African Studies, University of London. The rankings are based on measures such as student satisfaction, research assessment, entry standards, student staff ratio, academic services spending, student facilities spending, good honours degrees, completion rates and graduate prospects.
Savills Research on Residential Winter 2011-12 report states that “across the UK, demand for rental property continues to grow as more newly formed households look to rent, more first-time buyers choose to delay or are prevented from making a purchase and economic constraints push more people from home ownership into rented accommodation.”
The report adds that “in London, the supply-demand imbalance between renters and available property to rent is greatest and rental growth is strongest. We expect rents to rise by 20% across the UK over the next five years. In comparison, mainstream London rental values are forecast to increase by 27% over the same period.”
According to Marc von Grundherr, director of Benham & Reeves Residential Letting, one of the top letting firms in London, the average residential rent in London rose by 9.1% for the year to September 2011.
Benham & Reeves Residential Lettings have almost 60 years of experience in property rentals and management and has nine branches around London and international offices in India, Dubai, Hong Kong and Singapore.
“The London lettings market is very strong and there is really good demand,” says Von Grundherr, who was in Malaysia recently. One factor is that first-time home-buyers find it difficult to secure mortgage finance, so they have to rent rather than buy. Another is the lack of supply in the market as developers are not getting the finance.
Students are not the only demographic competing for property to rent in London. They make up 20% of the market, which is dominated by professionals and corporate executives, with a 60% share. The other 20% is made up of others.
Special needs of students
Overseas students tend to prefer bespoke institutional accommodation in London with communal facilities, says Helen Gray, associate director of CB Richard Ellis (UK) Research and Consulting — Residential, in an email interview. However, “there is not always enough of this type of accommodation, hence the overspill in the wider private rental sector,” she explains. “These students are willing to pay pretty high rents for these [bespoke] properties, compared with the private rental sector.”
She points to the popular unite-students.com website that publicises student accommodation. Some properties in the Camden area are renting for £250 per week, which is higher than what most young professionals with full-time jobs pay.
Von Grundherr notes that students also look to rent private apartments or private houses shared by many students, or general private rental accommodation where tenants may be students or non-students.
International students, he notes, usually have good budgets and are able to pay rent of £1,000 a week for a 600 sq ft unit in Central London. “But average rents are around £250 to £350 per week for students who are happy to live on the central London fringes,” Von Grundherr says. “Students are often prepared to travel and stay in new buildings with good facilities and nearby tube stations. St George plc’s Beaufort Park development in Hendon is a good example. From this location you can be in the centre of London in less than 30 minutes. Rents are 20% cheaper on the fringes of London, which is very attractive to students.”
Despite the promising returns, landlords may be reluctant to let their units to students. “It is true some of our landlords are reluctant to rent to students as they think they will have parties all night, leave the property in a terrible state and won’t pay the rent,” says Von Grundherr. “But I strongly disagree with this and [would] recommend students, especially those from overseas for the following reasons: they usually pay upfront, are usually fairly mature and study a lot, so having parties every night is very unlikely. And their parents will usually act as guarantor.”
CBRE’s Gray agrees that some private landlords may have reservations. One downside in letting to students is that the units will be left empty during the summer holidays. On the other hand, “students are usually as good tenants as any other occupier, as they are typically bank-rolled by mum and dad, or student loans. They are also more likely to stay for the year — minus the summer, usually — so there is certainty in that.”
Weakness in jobs market
Choosy landlords might want to reconsider their position of not taking in student tenants, considering the current weak job market.
“There are signs that the weakness in the City of London job market, where new employment vacancies are down 51% y-o-y at the current time, according to Morgan McKingley, is beginning to feed through the rental sector,” says Liam Bailey, head of residential research at Knight Frank in its latest Prime Central London Rental Index released in February.
“With the banking sector expected to deliver much lower bonuses in 1Q2012 compared with last year, tenants who are building deposits for eventual entry to the housing market are looking to reduce their rental costs in the interim. Additionally, rental budgets for corporate tenants, employees who have been relocated to London by their firms, have been cut back by anything up to 15% over the past 12 months,” says Bailey. The sub-£1,000 a week bracket, he notes, has seen more demand recently as individual tenants as well as companies have tightened their housing budgets.
This means the already limited supply will be fought over by an increasing number of students, professionals and corporate executives.
Another factor to consider is that some international students are willing to pay high rents, says Von Grundherr. “Overseas students in particular and mature students such as those studying for an MBA usually have a good budget,” he says. “Rents of up to £1,000 per week in central London are not uncommon.”
The expected increase in international student arrivals in the coming years and limited supply of residential units to let will keep the London rental market buoyant.
Benham & Reeves eyes Asian owners
The competition to rent property in London is intense. The capital of the UK is a “world city” that attracts not only students but also professionals and corporate types.
Malaysians are among the many foreign property investors in the UK market. Many have children studying in the UK. The similar legal framework of the two countries makes buying property there easier. Thanks to the weaker pound, Malaysian and overseas investors are helping to keep the property market in London afloat in an economy feeling the effects of the eurozone debt crisis.
London moves at a different pace than the rest of the country and the residential rental market is facing a shortage of properties to let.
In view of this, Marc von Grundherr, director of Benham & Reeves Residential Lettings, London, was in Malaysia in February to meet investors and hopefully, represent them in letting their London properties.
Von Grundherr says the number of properties let in 2012 dropped to about 300 units from 350 a year ago across the firm’s offices within London. “There is less stock because tenants are staying on,” he told City & Country.
“Renewal rates have increased to 82% this year compared with 65% last year. What we are seeing is a shift in the number of people renewing for a second, third or fourth year. That’s coupled with increased rents of a maximum of about 20% in some cases.”
With less stock available, new units are quickly rented out. “The market is moving fast and void periods are often just a day or two,” says Von Grundherr. “We recently let a large studio flat in St Stephens Gardens, Notting Hill Gate, after one viewing for £320 per week. The new tenant moved in two days after the previous tenant left.
“Our Highgate office recently let a 2-bedroom apartment with a garden in Dartmouth Park within just four hours of the property going on our websites. These examples are typical in the current market.”
Overall, 95% of stock in Benham & Reeves’ books are usually rented out in a week.
On areas for potential investment opportunities, Von Grundherr advises would-be investors to look towards the fringes of London. “To buy purely for investment, they might not only want to hone in on Zone 1 property because property there is the most expensive. A one-bedroom flat in Zone 1, in the best parts, is going to cost £700,000 to £800,000. If you go to Zone 3, you can get a one-bedroom apartment for between £250,000 and £300,000.”
For those who already have units in London, he says the properties should always be fully furnished so they can be let as quickly as possible. First-time investors, he advises, should buy smaller units like studios or 1-bedroom units as there is more demand for these. It is also a plus point if the property is close to a tube station.
Areas with potential for investment are Ealing in the West, Colindale in the North and Stratford in the East, he feels. Stratford is where the Olympics will be held this year and has been regenerated with good infrastructure and landscaping.
The average yield in this area and the fringes will be around 5% to 6%, says Von Grundherr. The average yield in prime Central London is between 2% and 4%, depending on the property and location.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 903, Mar 26-Apr 1, 2012
