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Purpose-Built Student Accommodation works for so many investors looking for a high supplementary income from a hassle-free fully-managed buy-to-let property. We are going to tell you how it works! Firstly, let’s run through the main facts and summary of why it’s so appealing … then we can delve deeper into how the student development and investment sector actually works.

The UK’s best and highest-yielding property asset class since 2015. In main University towns across the UK there is still massive shortage of accommodation for students
Cash-only investment from only £46,000 up to £90,000. Student tenant occupancy is
very high 95% –100% per annum
No Stamp Duty Land Tax (SDLT) on purchases under £150,000 Fully managed by student letting specialists: no looking for tenants, no void-periods, no maintenance or repairs to organise.

Student Accomodation

Best location for student accommodation investment?

Big cities do not always guarantee big yields – in many cases it’s the second-tier locations providing the highest sustainable yields. Location is really important, but why? What should we consider and be mindful of in these UK university towns and cities?

  • A clear under-supply of purpose-built student accommodation verses the number of students in the area.
  • Distance to the university campus or campuses, town centre and transport links – students’ sought-after accommodation with everything on their doorstep – its proven to maintain high occupancy levels and even dictate a premium.
  • Expansion plans of the universities like an additional campus, specialist study centres or renovations of the main building – the master plan to increase student numbers for future years in-take.
  • Re-generation areas in the city or town – this attracts overseas & domestic students, creates perfect job opportunities for undergraduates and better levels of appreciation for investors.
Why is student accommodation sold off-plan?

Investing in an off-plan property is simply as it sounds; you’re buying based on an architects’ floor-plan and the property is yet to be built. Vast majority of purpose-built student accommodation is purchased by the investor during the construction for a number of reasons and benefits. Completed and operational student accommodation is also available.

  • Many off-plan student projects are buyer-funded therefore you will earn interest on the deposit you have paid to the developer for your property normally between 3% – 7% p.a.
  • Pre-launch? This is the perfect time for you to get an early-bird incentive e.g.1% – 2% extra on annual yield or a discount from the purchase price e.g. £2,500 discount on first 50 units sold.
  • Off-plan prices are around 10% lower than market value during construction, therefore by the time the development has completed, the apartment would have increased by 10% and also increased in-line with current market value.
  • First pick of units – with the entire project or phase available this is another reason why investors like to invest early into the development. High floors, units with balconies and penthouses or duplexes are often the first to be snapped up.

Read full blog What are the benefits to buying off plan?

How Purpose-built Student Accommodation projects are funded?

This needs to be broken down into two sections as funds are required to buy the land and cash-flow/funding is needed to build the development.

Read full blog How do developers fund their off-plan property developments?

Buying the Land

The developer will set up an SPV so each development site has its own entity and depending on how the build is funded the developer will ring-fence the monies used exclusively for a development.

Commonly the land is purchased with use of:

  • Profit made from the last completed development
  • A Bridge-Loan (see below)
  • An investor or consortium of investors seeking a return once the project is complete
  • An investor or consortium that will buy the freehold from the developer

Building the Project

Buyer-Funded is where the developer uses client funds for the build. This is not a bad thing and designed to work extremely beneficial for both parties. It’s cheaper for the developer to pay interest to the investor (commonly 3% – 7%) than a bridge-loan or other forms of borrowing.

Bridge-Loan is a short-term loan used either until permanent financing has been obtained or money has been earned from profit eg: completion of a project.

Contractor funded is if a developer works with a large contractor to build-out the project, the contractor may provide funding.

Development Finance companies that specialise in residential and build loans only. There is a range of different types of finance to suit the developer: build to let, commercial; mezzanine.

Peer-to-Peer is another investment model going on behind the scenes. Instead of the buyers funding the build, the developer will borrow from a company who has attracted “lenders” earning a fix term interest paid monthly on the money they lend.

Self-funded – while this may not be the most common way for a developer to finance a development – often there is not enough profit from one development to fund the entire next project – certainly a contribution of developer-funds could get a project off to a great start.

Combination – with a brief overview of the most common developer lending and funding options, it is often the case there will be a combination of two of the above eg: Bridge loan and Buyer-funded.

Read full blog “Do developers use bank finance to fund their student accommodation developments?”

How does the fixed assured rental income work?

For many UK university cities and towns demand far outweighs supply and therefore purpose-built student accommodation has been able to secure an average occupancy of 99% across the UK (CBRE)

  • The developer will employ the services of an established student management and letting company or have a division within its development group.
  • An achievable annual rental appraisal is worked out – along with realistic service charge and management fees.
  • The appraisal will consider all variables e.g: area, exactly where the development is in relation to the campus and town centre, void-periods, utilities, insurances, service charges, maintenance etc.
  • Based on figures produced by the management company division the developer can offer the investor a fixed assured rental income of X% p.a. for X number of years.
  • Developers are so confident after this process that the assured rental is built into the purchase contract of the property.
  • This will be in place for a minimum duration of the assured rental period and is transferable at resale.
What happens after the fixed assured rental period?

Before your assured rental income period ends, your property management company will contact you about continuing with them in their current capacity:

  • Ensuring your property is tenanted
  • Payment of utility bills and maintenance and repairs
  • Transparent statements and paying your net rental directly into your bank account

Annual rents increase approx 2-3%p.a. During your fixed assured rental period rental rates are gradually increasing year-on-year, so by the time you are out of your assured period, you should be earning more per annum than the fixed assured rental amount.

How Does It Work - FAQs

FAQs about the PBSA Market

In 2015 national intake restrictions were removed completely, meaning higher-education institutions can now accept as many students as they can capacitate.   Impressively the UK is the second most popular location for overseas student which has resulted in record student intake numbers for the last four years.

In March 2016 the government introduced an increase in SDLT on secondary/buy-to-let property purchases which was to partway combat the house-crisis issue, caused by residential property being snapped up by seasoned landlords for buy-to-let purposes. The problem was escalating and the predicted shortage of UK homes was a staggering 1.8m by 2025.

Another reason PBSA helps the housing crisis is having only 24% of students housed in PBSA it leaves the vast majority of students in sub-standard accommodation, house conversions (HMO’s) which are likely in run-down areas and a far distance from the university campuses.

This really is a question at the forefront of an investors mind, the great news is Brexit fears appear to have had no effect on investing in UK PBSA, with levels increasing by 17% this year.

  • The status of a degree from a top university in the UK; such as Manchester University or The University of Liverpool isn’t likely to ever go away.
  • Overseas students come to the UK to perfect their English as much as to earn a degree.
  • The low value of sterling is likely to increase the appeal for students from India and the Middle East
  • According to UCAS for every accepted application for a non-EU student to study in the UK there were 7.9 applications

FAQs about PBSA development

Purpose-built student property types are commonly en-suites and studios and some developments will have a small number of one- and two-bedroom units. They are designed and built to a high standard and specification, with only the student in mind. A safe and secure environment is provided with constructive areas for both studying and socialising. There are standard amenities such as WI-FI, 24-hour security and bike stores and often additional facilities such as; laundry, gymnasium, games room and a cinema room.

A long stop date from the developer’s perspective protects the overall delivery of the project from unforeseen delays caused by issues commonly out of its control. A long stop date is part of the purchase contracts and it gives normally a 12-month time buffer to complete the development, sometimes the long stop can be 18-months or 6 months. In the unfortunate event the developer does miss the completion date and the project falls into the long-stop period, any interest you are earning on deposited funds during the build will continue to be paid to you as normal by the developer.

The developer will provide a 10-year warranty on build. This will be NHBC or similar such as CRL or Zurich.

This is more a risk for the developer and not for the property owner as you are being guaranteed the net rental. However, under this obligation we ensure the developers we work with have a contingency set aside in the event of any assured rental shortfall – this contingency fund is held in a separate account and paid by the developer to the letting company to top-up the net rental payment or in absence of a contingency fund at least access to available funds.

We need to bring it back to the due diligence we do. The student accommodation we put within our portfolio is where the local universities and higher education institutions have a huge under supply and there are expansion plans to increase the numbers of students year on year.

FAQs about PBSA purchasing

We always have a solicitor that we can recommend to you on every project. This solicitor will already be familiar with the project due to the standard 28-day turn-around to Exchange. They have already received a full contracts pack from the seller’s solicitor and have already prepared their Report on Title. The other benefits are: the solicitor fee is pre-negotiated and very reasonable and they specialise in long Leasehold purchase and property management contracts. From our experience we have found traditional conveyance solicitors are barely familiar with long Leasehold contracts – this can cause unnecessary delays and puts you at risk of losing the purchase.

Purpose-built student accommodation is classified as commercial, it is not subject to Stamp Duty below £150,000 – some developments start from under £50,000. Multiple purchases will be considered a combined purchase, so for example if you bought three properties and their combined value was over £150,000, SDLT would be payable. Please see the table below.

There is no set time frame between purchases for HMRC to consider them not combined, it would be at least six months, however if you bought a property and your source of funds was savings, then three months later you inherited a sum of money and invested that into another student purchase over £150,000 this would not be considered combined as the source of funds was completely different.

Purpose-built student accommodation is designed as a long-term, high-income investment; however, the answer is yes. The purchase contracts are fully assignable and you can sell your property the same as any property purchase. It is possible to sell your property during the assured rental term as it will transfer to the new buyer along with the property.

Try to leave enough time, there is no guarantee of a quick resale. We have resold property in the same development within one month of coming on the market and other properties it’s taken up to 6 months or more.

Capital appreciation is not so relevant for purpose-built student accommodation, the resale price will be relevant to the annual yield and will be based on a reasonable annual return that is attractive to the new buyer.

If you want to resell your property you will have a number of channels to go via, either ourselves at REW, any local agent or specialist agent and you could even offer it back to the developer. You will be selling a high-yielding asset that is already proven and running operational for x number of years.

In some instances, the developer will have a built-in buy-back at the end of the assured rental period. This will normally be between 100% – 110% of the purchase price. The buy-back will either be optional for both parties or structured where one or both parties can enforce it.

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