Posts

UKflag

Do you want high income or high capital growth from your property investment?

The answer to the above question seems obvious – most investors want both. Whilst it is possible to achieve this in some emerging markets, such opportunities come with high risk. The currency, political stability, ownership entitlement, re-sale potential are all issues that affect the medium viability of emerging markets. Most investors we speak to are seeking security of their capital with an attractive return. That means a lower risk strategy and mature but profitable markets like the UK are seen as preferable for this.

So can you enjoy both in the UK? The answer is no, you can’t if you want to minimise your risk. In the UK investors nee to clearly define whether they want a high income with capital growth that matches inflation or higher capital growth with income that typically is adequate to service a mortgage. If the marketing agent forecasts both, be wary – if it sounds too good to be true it probably is.

Whether you are an experienced property investor or just starting the process of putting together your portfolio, your aim should be to have a diversified portfolio. This can be achieved through exposure to different currencies, locations and sectors. Many investors are totally focused on capital growth (based on market vales rising), but there is a lot to be said to having an attractive and secure and attractive income stream as part of the portfolio. Property prices may go up over a period of time, but seeing money go into your bank account every month never loses its appeal.

Many investors we meet are heavily exposed to one capital growth market, often London property. This market has performed exceptionally well for many years and will continue to do so. A typical example of a well located capital growth opportunity is our Redmans Place, London E1 project. The apartments will rent easily to people working in the city and Canary Wharf and given its location and quality capital growth should be strong. With two bedroom units at GBP470,000 most investors will secure a mortgage. With gross rental yields of 4.5% – 5% gross (typical on zone one and two properties on current market prices) the net income will be negligible. This may be acceptable if the emphasis is on capital growth, but they are no ideal for investors who want an attractive income stream paid to them every month.

The alternative strategy to capital growth is to focus on income. In the UK you can buy cheap houses in many northern towns and put welfare recipients or immigrants in as occupants. This does not necessarily mean you will have a poor quality tenant, but it does mean you will not have a quality property in a quality area. Welfare recipient etc. rent in the bottom of the sector. Your re-sale potential may also be limited in such locations as people typically aspire to own property in better areas. Whilst your gross rental yield may appear to be attractive, after you take into account repairs and maintenance, voids etc. (let alone the management headache) the net yield may not be so.

For investors seeking a higher income opportunity, studio apartments may offer an affordable option. These can be targeted at the student or the general professional market. There is a general trend in the UK to downsizing in terms of residential property. People are prepared to give up extra space as they search for convenience and affordability. Studio apartments in city centres that appeal to professionals who want to be in the heart of everything make great rental investments. A studio unit in Redmans Court is an obvious example, but the income stream is still going to be less than a strategically located purpose built student accommodation studio unit which offer a much higher income stream.

Are there any downsides to buying a studio to be used by students? Of course, there is. Few, if any, investments are perfect. You have to be a student so you won’t be able to live in it yourself. The upside is that this is is seen as a plus as they offer much better security and hence appeal to students. There is no shortage of students and studio size units are highly sought after by post-graduate and more mature students so management issues are minimal. Another potential downside is that you won’t be able to sell it to an owner-occupier in the future. Does this matter if you sell it to another investor looking for a high income opportunity (and there is an increasing number of investors looking for that)? A great example of such an opportunity is our Majestic Court development where large studios can be bought from GBP49,950 and have a guaranteed tenant in place for five years at 8% per annum net of all costs.

Income or capital growth? As you can gather from the above, each has it merits and much depends on the individual investor. The first step is to sit down with the right property adviser (and no disrespect to most Independent Financial Advisers, we do mean a specialist property adviser) and discuss your needs and requirements. It is worth taking the time and effort to get the right advice at the outset. Having done that, the property world awaits you and there are some great opportunities for you to take advantage of.

Dashwood accom

Student accommodation funds, liquidity and the benefits of direct ownership

Many investors have entered the student accommodation sector through managed funds. Some of the funds have performed well, others such as Mansion and Brandeaux have experienced serious liquidity problems. Nevertheless, the underlying assets, i.e. the student accommodation units, have preformed well with most operators experiencing 99% occupancy rates and healthy investment returns.

When investors want to withdraw from a managed fund they expect to be able to do so and to receive their funds promptly. To facilitate this the funds typically keep up 10% of its net assets in cash. The managers argue that if more than this was kept then this would affect the fund’s investment return since cash does not generate anywhere near the return that student accommodation provides. In a normal market you would expect to see subscriptions being higher than redemptions resulting in the fund growing in size. The problem arises when there are more redemptions and the cash held (i.e. the 10%) is depleted. The manager is then forced to sell some of its assets, which brings with it a number of issues that have to be faced.

The funds typically own blocks of 200 units plus. They are extremely reluctant to sell a portion of these as the block would then lose its appeal to institutions etc who want to manage a whole block and not have to deal with individual unit owners. Some of the funds have complained that there are too few buyers for the blocks, but this has been disputed by a number of parties. There is strong demand from overseas institutions, with the flow of money from international investors, the majority of which has been from North America, passing the £1bn mark in 2013 for the second consecutive year, up from just over £275m in 2011. New funds are entering the market, including the Curlew Student Trust, which aims to raise £250m. The BlackRock UK Property Fund spent £50m and Standard Life spent £81m acquiring blocks in 2013. So much for there not being buyers for the blocks. There is always a buyer for a property, the only issue is the price that has to be paid.

Of course, once word gets out that a fund has a liquidity problem, other funds and institutions want to buy at a discount. If the block is sold at a reduced price the fund’s performance may be affected, which may cause more investors to withdraw, which will require more blocks to be sold and the problem goes on. Irrespective of this, more investors hear of the problem and start to redeem their money which create more liquidity problems.

We are not criticising funds, apart from the fee structure contained in the fine print, which is often far too high. We are simply pointing out that funds have the potential to suffer from liquidity problems, with all the adherent issues associated with that.

For buyers of individual units, the issue of liquidity does not directly affect the value of their investment in the same way it affects a fund. A fund with liquidity problems quickly becomes common knowledge, whereas the real reason why an individual buyer is selling a property is rarely known. The seller simply lists it for sale at a price and there is no expectation from a buyer that the seller is a distressed vendor.

It is true that property is generally less liquid than funds. However, if the fund is experiencing the above problem then from an investors point of view there is far less liquidity than if the investor directly owned the property. He or she is locked in and dependent on the manager to return their funds. At least with direct ownership there is always a buyer at the right price. The secondary market for student units is rapidly developing and going forward the sector will offer satisfactory liquidity and attractive returns.

Graduates in Cap and Gown

Student accommodation – The academic standing of a university and the re-sale opportunity

We are often asked how important is the academic standing of a university when determining the investment merits of a student accommodation unit close to that institution. Whilst some investors are inevitably drawn to leading universities such as Oxford and Cambridge, whether a university ranks 1st or 100th in academic achievement is not going to influence the success of the unit as a property investment. Demand for places in that university is important, as is whether there is enough suitable accommodation to cater for all its students. Not everyone can attend Oxford, but every student attending university has to live somewhere.

Demand for places in leading universities is growing, but so too is demand for lesser renowned institutions. In 2013 there was an over subscription of 181,000 applications for the 495,000 higher education places available for under-graduate students. This was a rise of 3.6% on the previous year. The demand from overseas students is set to grow as well. In his 2013 Autumn Statement to the House of Commons, the UK’s Chancellor, Mr. George Osborne, announced that an additional 30,000 overseas students will be allowed to enter the UK next year and the following year there will be no limit. This means universities will be free to recruit as many overseas students as they wish and will result in a substantial increase in the coming years. These students have to live somewhere and the supply of new purpose built blocks is not likely to satisfy the growing demand in the long term let alone the medium term.

In summary, its the demand for accommodation in that location and the secure income stream the unit generates that count, not the individual student’s educational prowess or the institution’s academic standing.

Another question we are often asked is whether there is a re-sale market for individual student units. It is certainly fair to say that this is a relatively new sector that is enjoying enormous appeal among individual investors. Most units are bought off plan using a forwarded funded payment method. This means that currently very few established units come on the market. There is a strong demand for established units which are already producing a secure income stream as not everyone wants to buy off plan. In the coming years, as more units are completed and occupied, more investors will have the opportunity to buy these. This will inevitably lead to an active secondary market involving estate agents, financial advisers, web portals etc. Where you have investors seeking immediate, secure rental income and owners who want to sell there will always be people who will step in to help and generate that business. It certainly helps if you buy and then re-sell through a long standing agent that you know will be around in years to come. You should have an established relationship and a high degree of trust with them. In any event, the buyer will probably be a parent of a student or someone looking for a secure and attractive income stream. If the property has a sound track record and is well managed, there will always be a buyer for it.

CIG

UK government changes to impact on student accommodation sector

In his Autumn statement to the House of Commons, the UK’s Chancellor Mr. George Osborne, announced changes that are likely to have a major impact on the central London residential market and the student accommodation sector:

1. Overseas investors will have to pay capital gains tax from 2015

Many people had always thought that if this was ever going to be introduced it would be the Labour party that would take that fateful step. It appears that the Conservatives have more back bone than many people thought. Mr Osborne’s statement that “Britain is an open country that welcomes investment from all over the world, including investment in our residential property. But it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not” is perhaps hard to argue with. Unless you are an overseas investor of course.

It will be interesting to see if developers who hold weekend exhibitions in Hong Kong, Singapore and Kuala Lumpur, and who sell vast numbers of London apartments, will enjoy the same level of success now that this tax will be applied to their buyers. Many of those buyers are seeking capital gains and whilst the finer details of the tax have not yet been decided, including the rate, its introduction will surely impact on demand.

The effect of this change is that many investors will decide that a higher rental yield is better than an uncertain capital gain that will be taxed. This is especially the case where the owner can claim a personal allowance to reduce his tax liability on his rental income. With the rental yield from student accommodation being seen as secure and attractive, more and more investors will enter this sector. That can only lead to one thing – student accommodation unit prices will rise. Good news indeed for the people who own units in well located student blocks.

2. The cap on the number of overseas students allowed to study in the UK is to be removed

Mr. Osborne has decided to increase the number of overseas students next year by 30,000. The year after that the cap will be removed and with no upper limit universities will promote themselves even more vigorously overseas as they seek to attract high fee paying students. There is already excessive demand for the limited number of purpose accommodation units that are available, but Mr. Osborne has taken no heed of this. In fairness to him, the impact of overseas students on the British economy is considerable and it is therefore understandable if he does not dwell on the problems these students have in finding suitable accommodation.

The upside of this change is that universities will recruit overseas students quicker than councils will grant planning consent and developers can build suitable accommodation. The result will be even stronger demand for purpose built student accommodation and, inevitably, higher rents. This is fine if you own a student accommodation unit, not so if you are a student trying to find accommodation. No matter how much rents rise though, students will keep going to university and the UK will still attract overseas students. A good British university education is certainly worth paying a little extra in rent. If you think rental yields in this sector are attractive now, in a few years time they will be even better.

We are pretty sure Mr. Osborne did not make his changes based on a desire to make student accommodation even more attractive as an investment. The good news is that they have. With more people driven to high income opportunities and rents likely to rise, the next few years will see even better returns for both both large and small investors in this sector.

Graduates in Cap and Gown

The need for 25% more university places will result in a continued shortage of UK student accommodation

There is an ongoing shortage of purpose built student accommodation in the UK and if comments made by that country’s universities minister the shortage is only going to grow. Universities in the UK have seen a squeeze on places in recent years, with thousands of students failing to get on courses. In a recent paper, Mr David Willets the minister warned that the number of places at UK universities will have to grow from 368,000 to 460,000 over the next 20 years to meet demand. If these are provided the accommodation shortage will become even more acute.

The comments and projections from Mr Willetts follow on from The Robbins report, which was written fifty years ago and called for and led to a bold expansion in university places. The report’s guiding principle was that higher education should be open to all able and qualified enough to go. The reality is that there are more applications every year than places available and that is not going to change unless the government takes action.

Mr Willets believes that due to the fall in the number of births circumstances have changed since the report was written. Educational standards have also improved with the number of young people with the potential to go to university increasing. He said “However, looking ahead to the 2020s, we can see the increase in the number of births since the turn of the century feeding through into more young people. Those pressures have already been felt in our nurseries and primary schools.”

The above does not take into account the growing number of overseas students that are coming to study in the UK. There are 435,000 at the moment and with the government and universities encouraging overseas students to come to the UK even more places will be required.

Of course, whilst there is no guarantee the government will act in time to prevent the problem from growing, the important first step of acknowledging the need for more spaces has now been taken. One option is for the government is to join forces with the private sector to establish new universities. The recent increase in tuition fees clearly indicates it believes people should pay for higher education and the increased involvement of the private sector seems inevitable.

All this means the demand for student accommodation will keep growing. Unfortunately for students, there is no likelihood that there will be enough purpose built accommodation in the foreseeable future. There are approx. 1.15m students living away from home in the UK and there are only approx. 450,000 purpose built units. This means that 700,000 students are in the private sector looking for accommodation, which is often poorly located and unsuitable.

With increasing numbers of students and restrictive planning and other issues holding back development of suitable blocks, there is going to be continued demand which will result in upward pressure on rent levels and capital values.

student pod

Is UK student accommodation an ideal property investment sector?

Student accommodation in the UK is experiencing sound growth as investors see it as a viable and profitable property investment sector. What was once the domain of the institutional investor is now being marketed to individual investors with investment levels starting from around GBP45,000. Many smaller investors have entered the sector, but is it simply a ‘flavor of the month’ opportunity or will it be a sound medium term investment sector?

To answer that question we must first look at the underlying demand for student accommodation in the UK. A common concern among investors was whether the recent increase in tuition fees would reduce the number of applicants and universities would have unfilled vacancies. The good news (or bad news depending on your view point) is that the fee increase had minimal impact on applicants, which still exceeded the available places. For 2012 the total applications in the 18 – 20 age group were over 90,000 above the number of acceptances in 2011. These students still need somewhere to live and there has been no shortage of demand for well located, purpose built accommodation.

The ideal answer to the shortage of accommodation from a student’s point of view is for the universities to provide the accommodation at a subsidized rate. However, this is certainly not going to happen now or in the future. The government hasn’t got the political will let along the financial resources to fund such development. There would also be a public outcry, since overseas students would take many of the available spaces up.

The above means that the private sector has to step in and provide that accommodation. Whether we like it or not, today’s youth don’t want to live in Mrs. Smith’s back bedroom five miles from the university. They want to live within walking distance, close to their friends and in modern blocks with all the amenities including en-suites, common rooms etc. Whilst these places cost more than Mrs. Smith’s back bedroom, many parents can still afford to pay the figures being asked and this will continue indefinitely.

Of course, some locations will fare better than others over the long term. A few will be over developed which will put a strain on the rental yield as students have more choice and are in a stronger negotiating position with a landlord. However, places like Canterbury, Chester, York and Durham should not suffer from this problem, as the local councils will not allow over development to adversely impact their cities. Of course, some investors will be attracted to the major cities, but care should be taken in this regard. At the end of the day it is all about how many students are studying in the location, how much suitable accommodation is available and how much future development will the local council allow. If development is restricted and there is currently a substantial shortage of accommodation the prospects for income and capital growth should be sound.

The above is clearly demonstrated in the case of Chester. This is a historical, walled city dating back to the Roman times and the council will not allow over development as it seeks to main its heritage and tourist appeal. The University of Chester provides accommodation for 1,000 students, but there are over 16,000 studying in the city. The current shortage of suitable accommodation will remain for the foreseeable future.

Another concern of smaller investors is the ability to re-sell the unit in the future. The secondary market is certainly not as well developed as the general residential sector, but this is gradually changing. The sheer number of quality units that are being sold means that in the future financial advisers, local estate agents and web portals will be actively involved in the sector. Where people want to sell and others want to buy, advisers and agents will always put themselves in the middle and student accommodation will be no different.

One particular aspect of student accommodation that appeals to smaller investors is the rental guarantee offered by some developers. We have been developers ourselves and we are a little cynical about such guarantees. However, in the case of student accommodation, particularly in the better-suited locations, rental demand is so strong the guarantee has some validity. Some developers are offering a 9% net yield and even after some pruning by our ever-cautious team the net figure still comes out around 8% p.a.

In terms of capital growth, the sector will, in our opinion, lag behind prime central London apartments which has enormous international following. However, given its growing popularity both in the UK and overseas it should at least match, if not out-perform, the general residential sector. Student accommodation should be regarded as an income play and will appeal to those who are looking for an ongoing, secure and attractive rental income. Many investors feel that in times of uncertainty this is preferable to the vague prospects of capital growth in the general residential sector in the future. If you don’t want to buy in prime central London, they are probably right.

residences-031114

Student accommodation impresses property investment analysts

The UK student accommodation sector continues to impress property investment analysts and commentators. Good growth is expected over the medium term and the sector is gaining wide market acceptance. The introduction of higher university fees does not seem to have affected the market, with demand still out stripping supply (and likely to do so for the foreseeable future). Prices for individual units are around GBP50,000 and net rental yields are 5% plus. This makes the units appealing to smaller investors seeking security and attractive return.

We have just released our 2012 report on the sector and it makes interesting reading. If you are interested in researching this sector of the property investment market, please contact us to receive a copy of the report.

Borden_Court_Image002_RevA[1]

Report advises that student accommodation is a sound property investment

Savills has released its summer 2012 research paper on the UK student accommodation sector. It certainly confirms that the sector has much to offer investors who are looking for a secure income stream. The report is summarised below;

Summary of Summer 2012 research paper

Student housing may be considered a maturing sector but it has performed well over the last five years, showing average annual total returns outperforming many commercial property asset classes.

Not surprisingly, demand from investors for high quality stock in safe locations has been increasing in the light of this performance along with the number of equity investors looking for sound, long term income streams. We anticipate this will continue for the rest of the year at least.

In the longer term, we see prospects for increased investor demand with investment yields moving in for long dated income streams. Meanwhile, the demand-supply imbalance in the sector should ensure rental growth.

The prospects for additional demand to UK institutions from overseas students are good, at a time when global student mobility is increasing, together with a doubling of higher education students to 262 million by 2025, provided UK immigration policy allows for this growth.

Supply growth is severely constrained despite a relatively healthy flow of development activity during the downturn in prime locations.

The market will remain under supplied at current levels in relation to both the growth in student numbers and latent demand from students currently housed outside the sector, as banks disappear from the debt and development markets.

Increasing risk aversion, combined with scarce availability of senior debt for construction finance, correlated against a period where there is a need to refinance a number of significant maturing five year loans will allow opportunistic investment from globally mobile equity providers looking for secure, long dated income streams and to diversify portfolios.

There is a strong likelihood that universities will increasingly seek to avoid calls on capital and revenue arising from their own ageing accommodation and will look to generate capital receipts (and improvements to their accommodation) from investors through stock transfer.

This offers unprecedented opportunities for investors in high-quality university
locations not otherwise available to them due to lack of newly built supply.