Student pods (PBSA) – the latest buy-to-let vogue where investors buy a single room in a development – are failing to deliver double digit returns, according to The Mistoria Group.
For a relatively modest cash price, you get a stake in the property market in a top university town and a guaranteed income – all without the hassle of having to manage a buy-to-let. That at least is the sales pitch.
Developers are selling investors pods or studios that offer en-suite rooms in new modern city centre buildings, complete with gyms and cafés. For their money, which can be as little as £40,000, investors are being promised a ‘rental guarantee’ for a set number of years, with management of the property and finding tenants taken care of.
Some of the sales patter sounds highly alluring. Apartments in Sheffield are on offer from £55,995. Investors are promised guaranteed returns of 8.9% for five years. Student pods in Greenwich, London are available from £82,500 with 10% guaranteed income in year one and projected returns of around 9% thereafter. There are many more examples like these all over the UK.
But, as Mish Liyanage, Managing Director of The Mistoria Group explains, behind the marketing are some hidden risks: “Student pods are not considered to be individual properties and therefore cannot be bought using a mortgage. While not impossible to obtain finance to buy a student pod, it will not be through a traditional buy-to-let provider, so you will not be able to get any of the leading buy-to-let rates.
Most student pods are sold ‘off plan’ – which means before they are complete and in many cases before construction has even started – and come fully managed. This means investors are exposing themselves to risk on two fronts ‘development risk’ and ‘management risk’. For example, the development may not be finished, or the developer may not have the skill or experience to manage the development and if they do how much will they charge for their services.
Another concern is the ‘rental guarantee’ offered by developers. This can often be an overstatement. The guaranteed rents are attractive to investors, but often they fail to materialise. I believe that investors are actually subsidising the guaranteed rent by paying an inflated price for the unit they secure.
There have been a number of student pod schemes that have stopped paying out the guaranteed rents soon after completion and investors have then discovered that the real market rate for the rents is much lower, reducing their yield, leaving them with an underperforming asset that is difficult if not impossible to sell at an acceptable asking price to the investor.
Finally, the exit strategy. With a normal buy-to-let you can sell the property at any time on the open market, through a reputable estate agent and expect a reasonable capital appreciation. However, selling a student pod will encounter problems. For example, who decides the market value? As a piece of real estate per sqm it is very expensive (double the average market value), there is no established resale market. Who will sell it? Is it an investment, or is it a piece of real estate?
If you buy a HMO, you can apply for a mortgage and there is a buoyant market for this type of student property. If you are building a portfolio, you can lend on your equity in the HMO to fund further investments.”
There have been several high-profile cases in which student developments haven’t delivered as promised. Last November, Liverpool-based Middle England Developments was put into administration by its owner, property developer Nigel Russell, with debts of £3m. The firm had sold individual pods to investors for about £50,000, with ‘guaranteed’ returns that failed to materialize.
Meanwhile, this time last year, another developer, FreshStart Living, agreed to hand over £131,000 in unpaid rent to 70 investors. It has since stopped selling pods to individual investors. FreshStart Living has gone under owing thousand to investors and agents.
Mish Liyanage continues: “In spite of the poor investment record of pods, student accommodation can offer a number of attractive features to investors: yields are high as students settle for less space than other tenants; occupancy is typically high; and it is neatly counter-cyclical, as more people go to university during economic downturns.
Student housing is increasingly a global asset class. What’s driving investment is the relentless rise in student numbers worldwide. The British Council estimates by 2020, the global population of higher education students will grow by about 21 million, to roughly 190 million students overall. Increasing numbers of students are coming to Europe to study and the UK’s highly ranked universities make it the top destination.
The UK is ranked No 2 in the world’s top 100 universities, after the US. The bottom line is that the provision of student housing has simply been unable to keep up with demand.”
This article first appeared on the PropertyReporter website on 18/6/14