Investing in student accommodation has long been considered a lucrative venture, offering attractive rental yields and a consistent demand base. However, the landscape for student property investors is undergoing significant changes, influenced by evolving regulations, demographic shifts, and economic pressures. For individuals like Rakesh Parmar, who’ve built a portfolio in this niche, the path forward requires a careful assessment of the risks and rewards.
A Generational Business Adapts to Modern Challenges
Rakesh Parmar, a seasoned player in the student rental market, juggles his NHS IT role with managing eight student properties in Leeds, a venture he inherited and expanded from his father. Like many landlords, he has witnessed the sector evolve drastically, from the days of advertising rentals on shop notice boards to modern online platforms specifically for student accommodations.
However, it’s not just the advertising that’s changed. The regulatory environment has become far more complex, with increased health and safety obligations. Yet, Parmar remains hands-on, personally overseeing marketing, viewings, contract drafting, and maintenance, thereby saving on agency fees.
The Appeal of Student Lettings: A High-Demand Market
The UK has seen a 43% surge in student numbers since the early 2000s, a trend that has significantly benefited landlords by minimizing empty periods and driving up property values. Coupled with historically low interest rates, this environment has fueled property investments, especially in university towns.
However, landlords now face universal pressures: rising mortgage costs, diminishing tax benefits, and the pinch of inflation. Moreover, impending legislation threatens the fixed-term tenancy system, a cornerstone of the student rental model.
Explosive Growth in Student Numbers Driving Demand
With student numbers escalating from 2 million to 2.86 million between 2000 and 2022, demand for accommodation has skyrocketed. This demand extends beyond traditional private rentals, with corporate-run, purpose-built student accommodation (PBSA) also thriving.
Interestingly, it’s not just UK students driving this demand. There’s been a notable influx from countries like China and India, contributing to a market that’s attractive for its “decent rental guarantees, decent yields, and full occupancy,” according to Richard Ward of research group StuRents.
This high demand has seen rental yields jump from an average of 5.6% to 6.7% between September 2020 and August 2023, with smaller university towns offering the most lucrative returns.
Mounting Pressures: Rental Costs and Property Sales
Despite this promising scenario, there’s evidence of landlords, especially smaller ones, exiting the sector. High property prices, soaring interest rates, and regulatory complexities make it a challenging environment, particularly for those who entered around the millennium.
These pressures are compounded by demographic shifts. Older landlords are approaching retirement, considering offloading assets they acquired during the sector’s boom in the early 1990s. Furthermore, competition for houses of multiple occupation (HMOs) isn’t just from students — young professionals priced out of smaller properties are also vying for these spaces.
The Financial Squeeze: Rising Mortgage Costs
The financial burden for landlords, particularly those with significant mortgages, is escalating. Since November 2021, the cost of buy-to-let loans has surged, with the average five-year fixed mortgage rate standing at a hefty 6.18%. Consequently, property investors face an annual mortgage interest bill of £15 billion, a staggering 58% hike.
While landlords might hope to recoup costs through rent increases, their capacity to do so is constrained. The government’s modest 2.8% hike in student maintenance grants falls well short of inflation, capping the potential for rent hikes.
Legislative Changes: The Renters Reform Bill
The proposed Renters Reform Bill is a source of anxiety for many landlords. By abolishing short-hold tenancies and Section 21 evictions, the bill disrupts the annual tenancy cycle crucial to student accommodation. This legislative uncertainty, alongside the financial pressures, suggests a cautious approach for potential investors.
The International Student Factor: A Lucrative Niche
An interesting development is the surge in affluent international students, particularly from regions like the Middle East and China. These students often pay substantial rents upfront and seek high-end living conditions, providing a profitable niche for landlords like Kevin Moore in Nottingham.
The international student population has jumped 44% since 2017, intensifying demand for premium accommodation. However, these rents are beyond what most UK students can afford, exacerbating the overall housing pressure.
Conclusion: A Sector at a Crossroads
The student property investment scene is at a pivotal juncture. While the demand is robust, particularly with the influx of international students, landlords face financial strain and legislative uncertainties. The Renters Reform Bill, if passed in its current form, will particularly impact the traditional student letting cycle.
Landlords must tread carefully, staying attuned to local market conditions and legislative developments. For now, a watch-and-wait approach seems prudent, especially for new entrants considering this historically rewarding investment path.