September marks the start of the new academic year, with students flocking back to universities across the country. In recent years the student housing market has changed beyond recognition – so what does the future hold? And is there still a place for the traditional student landlord as numbers are set to decline? In this article from our most recent edition of Residential Property Investor we look at the vital role of the PRS when it comes to providing students with homes.
Think of student digs and what comes to mind? Whereas 20 years ago it might have been images reminiscent of The Young Ones or Rising Damp, today’s student accommodation is more likely to resemble a luxury hotel.
Glossy brochures promise students rooms featuring en-suite bathrooms, study space and stunning interior design, with communal areas including gyms, music rooms and games halls.
Investors seem to be throwing up blocks of student flats in every major university town, but are these what students actually want?
And even if they do, can they actually afford them?
Current student rents in the UK range from a lowly £160 a month in Bradford to an eye-watering £34,000 a month in Mayfair, so it is clear there are huge variations in the types of accommodation out there.
While the luxury student homes dominate the headlines, the truth is that many students struggle to afford them, with most of the demand coming from overseas.
In fact, there is increasing evidence that there is an oversupply at the top end of the market.
Even those who have the cash often shun a cossetted life in purposed built student blocks to live in a shared PRS home once their first year in halls is over, with up to 45% of the country’s 2.3 million students living in the private rented sector.
But with lower birth rates seeing the number of 18 year olds bottom out over the next few years, an affordability crisis as fees and rents rise and a fall in demand from overseas students, what does the future hold for the student landlord?
The question – and others – were discussed at Westminster Education Forum conference: The Changing Shape of the UK student housing market, where industry professionals discussed the challenges facing the sector, including student numbers, affordability and anti- social behaviour.
So, what do students want?
One of the major issues to come out of the conference was that despite the best efforts of investors, student accommodation that looks more like a high-end bar than a place to live, isn’t necessarily what students are looking for. Especially at the prices they are being asked to pay.
Karen Burke, head of accommodation services at Sheffield Hallam University and chair of the Association for Student Residential Accommodation said students see moving into the PRS in their second year of university as a‘rite of passage’.
She and other university representatives spoke of their frustration that private investors are building high-end accommodation, including unpopular studios (for which there is little or no demand) without consulting with them.
Lisette Metcalfe, student housing services manager for Middlesex University who was at the conference said accommodation currently being built for students in the area is neither appropriate nor affordable.
She said: “We have had a number of companies contact us over the last few years with regards to new properties that they’ve already started building, or already built, with a large percentage of studios that just don’t suit our student body at all.
“We have quite a lot of UK students who simply can’t afford it. So, it’s just how do we get that message out there to these companies to say that’s not what our students want or need?”
This sentiment was echoed by Simon Bray from the University of Bristol who said the city was in the midst of a huge shortage of beds, but a ‘glut’ of studios that no-one wants.
Martin Blakey, of student accommodation site Unipol made the same point, quoting research by Morgan Stanley.
He said: “They did two studies of Newcastle and Liverpool, looking at the purpose-built student accommodation price bracket and what students felt they could, and wanted, to pay.
“Unsurprisingly in Liverpool lots and lots of people wanted to pay around £100 to £125 a week – very much in line with Sheffield – and no-one’s developing at that price point.
“Whereas if you go up to the higher rent levels, £200-plus, there’s stuff being developed that nobody wants.
“Someone mentioned surpluses, London, Manchester, Liverpool, Cambridge, Southampton, all surpluses.
“If someone had told me there’d have been 1,300 empty beds in Cambridge this year five years ago, I wouldn’t have believed them, but it is absolutely true.”
So is this good news for the PRS student landlord?
Maybe. It is generally accepted that standards in the PRS have risen since the introduction of swish, private halls, with students used to all the mod cons, such as dishwashers and a high standard of fixtures and fittings.
Rental returns on student property are generally considered good, but they are offset by the increased wear and tear and maintenance costs, higher levels of administration and higher number of call outs than one would get in a standard rental.
What does the future hold?
Looking forward, there is also the issue of falling numbers. While there is still a student to beds ratio of around three to one in the UK there is a predicted drop in student numbers, due to a perfect storm of low birth rates, increasing costs and a fall in the number of students coming to the UK from overseas.
According to UCAS there is a potential 5% reduction in admissions on the cards in 2017/18.
The number of international students, who make up 20% of the UK student population as a whole is also falling, with EU applications down 7% – said to be as a result of Brexit.
Figures from the Office for National Statistics released earlier this year showed the number of foreign students coming into the UK to study fell by 41,000 in the year to September 2016.
This could have a dramatic impact on student landlords, particularly in areas where universities have high proportions of overseas students.
The University of Manchester, Britain’s largest university, has already revealed it is axing 171 jobs, which union bosses say is down to ‘government legislation and Brexit’ as well as a potential decline in student numbers.
There are now fears other universities could follow suit.
Online student lettings firm Student- Tenant.com claims some PRS landlords are already taking a hit with those in Reading and Bath worse affected with demand for student properties of just 52%.
Danielle Cullen, managing director said: “We’re now seeing supply for student properties outgrowing demand in some areas, which could spell a huge problem for the student lettings market and the future of private student landlords.
“This is a complete shift from previous research we carried out earlier this year and last year, demonstrating an undersupply.
“There will always be areas where there is an undersupply of properties for a number of different reasons, but there has become an unusual trend developing in some locations where properties are always occupied by this time of year.”
How do I make my student home stand out?
We know there is a market for students looking for PRS homes, but also that it is a more competitive field then ever as standards improve and numbers fall.
So how do you make your student rental stand out from the crowd?
Kerb appeal: Does the property look good? Is it well kept? This is the first impression students – and their parents – will have of the property so make sure it is a good one.
Mod-Cons: Students are used to mod cons from living at home and modern student halls and expect white goods such as dishwashers as standard.
Consider including bills: Many students are willing to pay more to have bills included, and this can be particu- larly attractive to with overseas students.
Big up the amenities: Is your home close to the university/ bars and clubs/ shops/transport links? Not everyone will know the area, so highlighting local amenities can help.
Term time contracts or reduced rent: If you can provide an option for students to be contracted during term time only, this may give you an advantage.
Join an accreditation scheme: Many universities have their own accreditation scheme, such as SNUG in Sheffield, which give students peace of mind that their landlord is a responsible one.
The student mortgage
The Bath Building Society hit the headlines when it introduced a ‘Student Mortgage’, in which students who can raise a deposit can act as landlords for their peers.
In a nutshell, the Student Mortgage operates by lending 100% mortgages to students.
The students share their property with their friends, they collect rent from them and they use that to pay the mortgage.
The building society takes a parental guarantee over the mortgage payments, which operates in the same way as it would for parents acting as a guarantor for the rent, were their children living in the PRS.
The building society also takes a ‘collateral charge’ over the parents’ home in case the student fails to make the payments.
At the end of the course the student gets the opportunity to either carry on letting that property to other people and that becomes a buy-to-let, they live in the property on their own as their home or they sell.
The beauty of the scheme, according to the building society, is the fact that this is their main residence and therefore not a buy-to-let means they do not get hit by the capital gains surcharge.
Dick Jenkins, Chief Executive, Bath Building Society said the product, which has been criticised as only being available to the middle class has worked ‘spectacularly well’ for some people.
He said one of the bonuses is that students who buy their homes in this way take much better care of them then a they might a PRS property. And have, in many cases, made a profit.
He said: “We’ve seen some spectacular successes in recent years because rents have risen, property prices have risen, so students have actually managed to gain from the experience here.
“What we’ve also found, a little to our surprise and definitely to our regulator’s surprise, is that in ten years of running this product I haven’t had a problem mortgage, I have not had any default or arrears problems with these loans.
“So we actually tend to be selling to responsible parents, responsible students and actually it’s all been working out extremely well.”
What is it like managing a student let?
RLA director Mark Butterworth houses more than 100 students in a mixture of HMOs and purpose-built blocks in Manchester.
He said the yield from student lets has already gone down as tax changes bite and that any landlords moving into the market should do so with their eyes open.
He said: “I would say if you are going to move into student lettings be ready for a lot of hard work – and bear in mind it is not just a single student you are taking on, but their parents as well.
“There is a lot of maintenance involved. In the summer holidays, you find yourself with 100 bedrooms to paint, bathrooms to redecorate – all ready for the cycle to start again. Wear and tear is also higher than your average let.
“In addition to this each year you have to teach a new generation that they need to put the bins out, open the windows, switch the heating off when they don’t need it, that kind of thing.
“We have someone who goes around to clean out properties weekly, as, quite frankly, we have to, but there have still been issues with rodents attracted to takeaway cartons left in the garden and issues caused by limited bin collections. You also have to manage the beginning and end of ‘party season’.
“Rent is another consideration. In the HMOs, I charge full rent for 10 months, with two months half rent to cover the summer – 11 months in total.
“There are also licensing costs. Most student houses need to be licenced as HMOs as there are three or more unrelated tenants and there are plans to extend this.
“In terms of room sizes we are now being told properties that have been OK for generations are now not OK, with the extra burden of Right to Rent checks adding more and more paperwork which adds to your costs.
“The University of Manchester is cutting jobs over a predicted drop in student numbers and it could be that in future that the number of courses some universities offer could be cut back as more young people decide it is too expensive. This is something a student landlord would need to be prepared for.
“However, it is not all doom and gloom. All our properties for the 2017/18 term were let out before Christmas last year, with the cycle starting earlier and earlier – and with student lets you get your property back at the end of the year.
“Properties are also worth more as a HMOs than they would be otherwise and, now that fees have hit £9,000 a year, we find students are starting to take better care of them.
“However, I would still tell anyone thinking of entering the student housing market to make sure they do their sums – and go into it with their eyes open.”
Need to spruce up a property let out to students? The RLA offer a Tradepoint card free to members. For more information, see here.
Find out what the rental yields are at the Top 20 Universities in the Uk in our interactive map below:
*source: Univeristy league table rental yields analysed by RLA PEARL
*data is gross-yield data, based on top 20 University’s in ‘University league tables 2018’
According to the RLAs latest research around 14% of our members let to students. Are you a student landlord, and if so have you experienced any problems due to falling student numbers? Email firstname.lastname@example.org