Investing in Purpose-Built Student Accommodation (PBSA) in London

Digs, shared houses, homes in multiple occupation … whatever its form, student accommodation was once a rite of passage. After a year in halls of residence or university-owned blocks, most students would strike out with a group of friends to rent an average-type house in their college locality. Standards weren’t always great – and students didn’t expect much, but rents were cheap and the cold, the damp, the rodent infestations made for good stories in the pub.

Over the past couple of decades things have changed. Pressure on the private rental market in many cities has made house shares unaffordable for some and regulations around HMOs have made landlords up their game – and costs.

A predominance of student properties was also a problem for some local areas, as the housing was not as well-looked-after as neighbours might have hoped. This led councils to favour development of well-managed bespoke student accommodation that would also free up shared houses as family homes.

Plus, millennial students demand more than their parents’ generation – they’re not so keen on sharing bathrooms or scraping ice off the windows. They want modern, compact studios with good wifi, bike parking, common rooms and even onsite gyms in areas close to their university, such as Stratford and Havering. The many options for students set this type of accommodation apart.

What Is Purpose Built Student Accommodation?

All of this has led to a huge rise in purpose built student accommodation (PBSA) – if you live in a university town or area of London, you’ve probably noticed the blocks springing up around the place. Purpose built student accommodation is housing, as its name implies – clusters of compact, modern living spaces that appeal to students – and their parents, who see them as safe, clean and comfortable. Students tend to pay a weekly, all-in rental fee to cover bills, wifi and service charges, which is simpler for anyone new to budgeting.

Types of PBSA Available

There are a few different options available for types of purpose built student accommodation types:

1. Studio flats

Studio flats are ideal for students who are looking for more privacy than sharing a house or common areas with other students. They contain all amenities required for one person, including their own bathroom and kitchen amenities. From an investment perspective, there is a high demand to live in these types of property, and you can generally command a higher rent compared to shared accommodation.

2. Cluster flats

Cluster flats are groups of flats where there are several bedrooms with a shared kitchen and living area. Some will have ensuite bathrooms, but some have shared bathroom amenities. These types student housing offer less privacy than other accommodation options like studio flats but have lower rent and some students prefer the social aspect of sharing common areas including study areas.

3. University & privately managed accommodation

Many universities have halls of residence on campus or nearby, these can be university-managed or privately owned and operated. This type of PBSA may have a different set of investor obligations, so it is important to find out all the information regarding the investor requirements before deciding whether to choose to invest in this PBSA option.

Why Should I Invest In Purpose Built Student Accommodation?

These are some of the key reasons to invest in the PBSA market:

1. High Demand

Almost 3 million students attend UK higher education institutions, with the majority being full-time. And unlike elsewhere in Europe, a high proportion tend to study away from home, despite the cost. The UK also attracts large numbers of international students, who are more likely to opt for purpose built accommodation. Around 700,000+ international students are currently enrolled in studies in the UK, and the majority require student housing.

2. Rent Premiums

The rent premiums for purpose built student accommodation tend to be higher than standard student accommodation due to the extra convenience they offer and the additional amenities that they provide to students. Amenities are usually of a higher standard too, as they have recently been built to include modern facilities and some include gyms and games rooms.

3. Assured Rental Returns

Some PBSAs offer investors guaranteed rental returns for several years, so you have the financial certainty that you will be receiving regular income for a set period. Even without assured rental returns, student accommodation is generally in high demand.

4. More durable than converted flats

Purpose-built student accommodation is designed to suit student living, so the materials and fittings will be more hardwearing and durable and require less effort and cost to maintain compared to converted flats.

5. On-site management

Many PBSAs come with an on-site management team who will be responsible for most of the time-consuming tasks such as finding tenants and allocating rooms to students, dealing with day-to-day maintenance issues and the general upkeep of the shared areas and external areas. Onsite management will also usually take care of chasing any rent arrears.

6. Limited Void Periods

As soon as students have a place at university confirmed, they will usually look to secure their accommodation, and students going into further study years tend to arrange their accommodation months in advance. This means that they will often prebook and pay rent in advance for the academic year, reducing the risk of void periods and the loss of income caused by voids.

7. Possible Tax Advantages

PBSAs often qualify for some types of tax relief and capital allowances. Electrical installations, heating and ventilation systems, lifts, IT, security equipment, sanitary fittings and fitted furniture all qualify for capital allowances which can reduce your tax bill.

The purpose built student accommodation you choose may be classed as halls of residence and therefore be exempt from stamp duty, but you should get advice on this.

What Are The Drawbacks?

Unfortunately, like most types of investment, there are a few drawbacks to be aware of with PBSAs:

1. Limited Resale Market

You may find it more difficult to sell the property as there is a smaller potential buyer pool, given that this type of property will primarily appeal to student accommodation investors. However, there may be a waiting list of investors looking to capitalise on the benefits listed in the last section.

2. Lack of Control

Typically, investors have minimal control over the management of their PBSA as the general operations will be carried out by a management company. While the attraction of minimal involvement will appeal to many investors, some investors prefer to have a greater level of control over decisions regarding their rental properties.

3. Rental Guarantee Limitations

The rental guarantee may only be applicable for a short period of time, after which your rental income could be affected if student occupancy rates start to decrease. When you are reviewing different PBSA options, consider how long the rental guarantee period is before deciding whether to invest. If a deal sounds too good to be true, it probably is!

4. Competition

Over recent years, the PBSA sector has been identified as a hot investment opportunity and investors have saturated the market. It may be difficult to find the right PBSA investment in some areas or you may need to wait until new development projects are completed.

5. Potential for Overinflated Returns

Another drawback that could affect the success of your investment is that there is a risk that private developers are not completely realistic with their financial projections. There have been cases where developers have overpromised the potential rental yields to secure investors. Before entering into any PBSA investment you should conduct a critical evaluation to assess whether the numbers stack up to deliver the projected returns.

6. High Entry Costs

Investing in PBSA units will often require a full cash purchase. This is due to mortgage lenders being reluctant to provide mortgages for this type of property investment as they can be difficult to sell on if they need to repossess them. The requirement for a full cash purchase is one of the main drawbacks for PBSA investments.

How to Invest In PBSA

There are a few different ways to invest in PBSA. In addition to buying PBSA rooms directly, you may also consider investing through:

• Stocks and shares – You could purchase shares in companies that invest in PBSA developments.
• Investment trusts – You also have the option to invest your money in an investment trust or REIT that includes PBSA investments in its portfolio.
• Developing a PBSA Development – Investors with multi-millions of pounds to invest could decide to develop a PBSA development project and either keep the PBSA units themselves to rent out to students or to sell to other PBSA investors.

Want to become a more informed landlord? Take a look at what build-to-rent is and finding tenants for a rental property.

How Should I Choose A Location To Invest In PBSA?

If you are interested in investing in purpose built student accommodation, as with most property decision, location is key. Do plenty of research so you understand as much as possible about the benefits and possible pitfalls of each development. While it’s good to know the area you’re investing in, this hands-off type of project means you don’t necessarily need to choose somewhere on your doorstep.

The important thing is to look rationally at the business case. Don’t necessarily choose a city or area because it’s high-profile, fashionable or has a good football team. Look at student numbers alongside the housing stock available – the classic supply and demand ratio. At Sandra Davidson, we have been providing advice to investors in London for many years, and you can read more about our services in our blog.

What Protections Are Available To Investors?

Students tend to pay for their PBSA termly or yearly in advance and have parents as guarantors too. Choose wisely and your student block may be in high demand, with a waiting list of students, should a pod become vacant because someone decides to leave their course. In any case, many developments offer you a guaranteed rent over a certain period.

Investor Questions About PBSA

Find Out More

If you’re curious about in investing in purpose built student accommodation as student numbers increase – or in a traditional buy to let, talk to us. We can discuss your circumstances and suggest options that might work for you in popular student areas such as Hackney, Stratford and Tower Hamlets.

Looking for a stress-free lettings solution? Then explore our guaranteed rent services in Tower Hamlets, Greenwich, Lewisham, Southwark, Bromley & beyond.