Experts consensus as we near a health-led recession
- Restrictions continue, due to Coronavirus, as we head towards an inevitable deep recession
- Experts urge investors to understand the economic shock and recovery scenarios
- Continued lockdown means predictions of the economy shrinking to 35%
The echoing advise is:
- Look at your investment options now and check your portfolio is recession-ready
- Lesson the high-risk portfolios and diversify
- Look at your sectors / asset classes – ‘rebalancing’ is the consensus
- Look towards defensive asset classes
The forecast is a recession is nigh, so how bad is it looking?
If the shutdown continues this health-led recession will be the worst global economic collapse since the Great Depression of 1929 and the global economy would decline by 3%. Britain would contract by 6.5% and the US by 5.9%. These were the words of The International Monetary Fund last month.
There is no precedent to what we are currently living through. An emergency global standstill that the world was not ready for – the outcome is somewhat predictable. However, experts are torn over how the economy will contract, with many predicting a positive quick economic recovery after a deep but short recession.
But nonetheless to successfully invest or rebalance your current investment portfolio we must look at robust long-term investments and defensive asset classes.
Experts say lessen high-risk portfolios and diversify
Through every economic downturn, as investment experts always say, stick to your investment plan and long-term goals. Rational and well-advised investors do not jump out at short term volatility or a slowdown in investment markets or sectors.
As David Coates, MD at REW suggests, “A looming recession presents investors an opportunity to remind themselves, why they are an investor, what their investment goals are and to re-look at their portfolio to ensure nothing is lacking.”
There are funds in specific sectors, that offer a defensive approach, such as: health, insurance and even, mulit-asset funds with capital preservation at the core, but let’s strip back one defensive asset class and look at how it holds its own during a recession.
Purpose-Built Student Accommodation (PBSA)
A Defensive Asset Class
PBSA has proven itself be a defensive asset class over the years.
Previous to 2015, and maybe even 2017, student property investment was an ‘alternative’ asset class that attracted investors that wanted to diversify their portfolio – maybe it was to balance against their higher-risk investments or the low-risk verses the high-return appeal – a return comparable with some of their more volatile market investments.
However, in more recent years PBSA investment has created an asset class of its own.
It’s been realised by retail investors, major investment funds and blue-chip companies, that it has the characteristics of a low-risk defensive asset class: fixed interest, assured rental returns and ring-fenced capital – these returns are extremely sustainable, favourable and they increase year-on-year, aligned with student applications, enrolments and university master-plan expansions.
Not only has student investment become a mainstream asset class; investors are diversifying student investments with student investments.
PBSA – Counter-Cyclical
What really sets PBSA apart is its counter-cyclical nature. Student numbers increase during economic downturn, as people look to up-skill and return to university while they wait for the job market to regain, or students stay in higher education – naturally when this happens demand for student accommodation tends to increase.
We may see a short-term impact while the market and situation normalises, and the current situation may prompt overseas students to study closer to home, it’s predicted however this will be a short term response.
The UK and Europe will remain one of the world’s most popular student hotspots. Demand from overseas for high-quality accommodation is expected to rise once the travel restrictions have been lifted – with students particularly coming from China and India.
PBSA – Past Recovery
PBSA was one of the few asset classes to show resilience during the 2008 financial crisis and provided investors with robust returns given its counter-cyclical nature.
PBSA – Asset Ownership
There are sometimes question marks over the ownership of student studios or en-suites, however, like any buy-to-let property the investor has full asset ownership of the property which is registered at Land Registry by the conveyancing solicitor.
Investors also favour that there is no stamp duty (SDLT) with the purchase of PBSA (under £150k). The only proviso is, with student planning the apartment can only be let to student tenants – which is one of the reasons all projects are let and managed by a specialist management & letting company.
Return on Investment
And the other reason a specialist management & letting company is vital?
Developers need a student management company – often from planning & conception – to provide a clear and stable forecast so they can offer investors an assured rental return at a sustainable percentage for a fair number of years.
The management company then undertakes a fundamental role from project completion – providing protection for all parties – ensuring that contractual obligations can be fulfilled without the developer needing to dip into their short-fall rental contingency or project profits.
Ring-fenced and lessening the risk
Who doesn’t like a ring-fenced investment! With due diligence as important as ever, we must be diligent and must ensure the developers we get into bed with are being so too.
Funding for purpose-built student projects, in most cases, are buyer funded. The developer sets up an SPV to purchase that specific development site. All funds are tied to this limited company and this company only.
Investor-funding / buyer-funding became increasing popular after the financial crisis in 2008 – in the post-period when banks were still not lending – developers saw how extremely beneficial it could be for both parties. It’s cheaper for a developer to pay annual interest per month to investors (varies avg. 4% p.a.) than borrow from the bank.
It can also provide a quicker route to fruition – which is the objective for developer and investor alike.
The financial structure is transparent from the onset and once Exchange deposits are paid -and all subsequent stages payments, if applicable – the monies are held in escrow with the solicitor and can only be used for build purposes with production of an invoice from the developer, following sign off or certificate from an architect, a QS or the cost management team.