Did you know that student accommodation earns 4–6% yields per annum on average? George Kachmazov, real estate investment expert and managing partner of Tranio.com, explains why it brings in twice as much as standard residential property (2–3%) and how to choose the right city.
International investors have a problem: the optimal property investment (in terms of risks and yields) is hard to come by, especially in another country. Non-residential commercial property is usually far off budget for small investors due to the price. Tranio.com has majority of Russian buyers looking overseas but most of our clients buy residential property to rent out. While long-term rentals have evident advantages, like ease of management, they also have disadvantages: relatively low yield rates (about 3%) and tenant evictions if there are any issues.
A less-explored option for minimal-loss investments is student accommodation because risks and the yields are balanced. Nevertheless, as little as 5% of Russian-speaking investors even think about this type of vehicle even though abroad it has long been considered one of the most profitable and promising property types.
Since 2012, foreign buyers have invested $6 billion in student apartments (and these are only major transactions of over $7.5M). So it’s worth asking, “why is it so attractive?”
First, the number of international students is growing. According to the OECD, the number of people studying abroad is growing exponentially: from 2 million in 2000 to 4.5 million in 2012 and 8 million by 2025. In addition to this, the growth of the middle class and the number of affluent people in countries with developing economies (e.g., China) also implies that demand for student rentals is going to increase.
High demand means that this investment has lower risks than say, standard commercial property. For instance, tenants for offices are greatly affected by the economic situation, but students always need accommodation, regardless.
At the same time, student apartments have higher yields than conventional long-term rentals. Property located in good neighbourhoods of European cities yields 4–6% per annum on average, compared to conventional residential property (2–3%). Yields can also be higher or lower than 4–6% depending on how large the university is, how far the apartments are located from the institution as well as the building quality. Therefore, higher quality flats in a good location have lower risks and higher yields.
This type of investment has a relatively low market entry threshold as prices for apartments start from €90,000–100,000. For instance, in Liverpool investors can buy new student apartments of 17–23 sq m for £70,000–100,000; a studio worth £70, 000 will earn 7% yields (£4,900 per annum). Buyers can also reduce the financial burden by taking out a loan. A whole building can cost anywhere from €15–30M. For example, a student apartment complex containing 100 units in Nuremberg costs €14.7M with a yield rate of 4.9% (over €720, 000 per annum).
Another advantage for foreign investors is that they don’t have to manage the property. For those like our clients (who run a business in Russia), foreign property is a means to maintain capital, not their main source of income, and they don’t have time to manage it independently. In the case of student accommodation, a management company (often the developer) is in charge of the day-to-day running of the rental (finding tenants, making repairs, etc.), taking 10% of the rental income for their services.
For individuals, co-investing in the construction of apartment complexes in Europe is also a passive investment (managed by the company responsible for administering the project). Such buyers not only get the rental income but also earnings from the redevelopment.
However, as with any real estate investment, putting capital in student apartments comes with its own risks. They are difficult (or, better to say, impossible) to repurpose because they are located in specialised complexes near universities, where only students are authorised to live. Investors can’t use the apartment for personal accommodation, nor accept a tenant who is not enrolled with the university. And if the apartments are located in an area that is not very popular or designed for a university that is losing demand for its academic services, then it will be difficult to sell (though not as difficult as commercial property).
It is important to understand that residence halls and standard flats in residential buildings are not the same beast. Developers often exploit lack of investment experience and advertise studios in apartment buildings near universities as student accommodation. The difference however is clearly defined by law and the documents confirm that the property can only be used as a residence hall for students.
As I mentioned earlier, student apartments yield 4–6% so if a seller promises high yields (9–10% or higher), the investment will most likely have additional risks: unattractive location, and, consequently, low demand, ineffective management or the poor state of the premises. To avoid the latter, it is better to buy new property because repairing an existing property can quickly cost a lot and have a negative impact on the yields.
Where to buy
The UK, Germany and France are the best places to buy. These markets are reliable and characterised by high demand from local and international students (10–20% of the total). Opportunities for private investors in Austria, Spain and Switzerland are limited as these properties are usually bought out by corporate investors— companies and real estate funds — as early as the design stage. As for the USA, the world’s largest student apartment market, it is oversupplied, rental rate growth is restricted, and even the local investors are heading to Europe for better offers.
When choosing a city, the investment should always have a “magnet”: a popular university where supply is low and student apartments compete with privately owned flats. The demographic situation (i.e., current and future growth of student numbers) is also of great importance. If it doesn’t change or falls at the same time as new residence halls are being built, then occupancy rates will be low, apartments could remain vacant and the investment won’t generate a profit.
For example, in Germany the number of students is growing almost everywhere, but cities like Jena and Greifswald have seen student numbers shrink by 10–11% in five years. However, cities in Bavaria (e.g., Würzburg, Nuremberg, Passau) as well as Heidelberg and Frankfurt am Main have potential. In the UK, large university cities with low supply are Bristol, London, Oxford, Edinburgh and Manchester, making them promising locations for student accommodation. In France, Aix-en-Provence, Lille, Montpellier, Pessac (Bordeaux), Marseille, and Strasbourg offer quite good investment opportunities.
Tip! Be among the first to learn when and where a new faculty or university will open and buy apartments nearby. At the end of 2017, the construction of a new campus in Cardiff is going to start. It should attract 2,000 students from all over the world and, by 2019, the largest Social Studies campus in Europe will open, accommodating lecturers and students from several universities.
The growing presence of Internet technologies will help the rise of distance education but conventional modes of academic studies will remain top dog in the arena so student apartments located near good universities will still be in demand.
George Kachmazov, managing partner at Tranio.com