Student pods are failing to deliver double digit returns for property investors, according to student property investment specialists The Mistoria Group.
Student pods, the latest buy-to-let trend which sees investors buy a single room in a development, in theory means that you get a stake in the property market in a top university town. This brings a guaranteed income without the hassle of having to manage a buy-to-let. The Mistoria Group, however, believes the pods are not living up to their sales pitch.
Developers sell investors pods or studios that offer en-suite rooms in new modern city centre buildings, replete with gyms and cafés. For as little as £40,000, investors are promised a ‘rental guarantee’ for a set number of years, with management of the property and finding tenants taken care of.
It all sounds highly appealing. For example, apartments in Sheffield are on offer from £55,995 and Investors are promised guaranteed returns of 8.9% for five years. Elsewhere, in Greenwich, pods are available from £82,500 with 10% guaranteed income in year one and projected returns of around 9% looking forward. Across the UK, there are many more examples like this.
Whilst it sounds good at face value, PIT blogger Mish Liyanage, Managing Director of The Mistoria Group, warns that there are hidden dangers behind the shrewd marketing.
“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,” he said.
“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.”
He adds: “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.”
The Mistoria Group’s claims can be backed up by several high-profile cases in which student developments haven’t delivered on their promises. Liverpool-based Middle England Developments was put into administration by its owner, property developer Nigel Russell, last November, with total debts of £3m. The firm had sold individual pods to investors for about £50,000, with ‘guaranteed’ returns that failed to materialise.
Another developer, FreshStart Living, also agreed to hand over £131,000 in unpaid rent to 70 investors this time last year. FreshStart Living has since gone under owing thousand to investors and agents.
The article first appeared on Property Investor Today