Student accommodation or university apartments are becoming a very popular investment in recent times while people are chasing yields and higher rental returns. Generally, student accommodation is located near universities and TAFEs that are purpose built accommodation used by students.
Sometimes it can also be used within residences that have been converted from standard family homes to student housing but are located in university precincts and have good access to public transport. In both cases, the rooms are individually leased and rented to students, they are fully furnished and include internet and basic amenities such as electricity, water and gas.
Why would people invest in Student Accommodation?
By the end of 2013, there were over 350,000 student visa holders living across Australia, with the number of total visas having increased by over 13% in the last quarter of 2013 alone! The Australian government reported they are expecting a 30 pre cent increase in international students coming to Australia by the year 2020.
Student accommodation is also appealing to investors as there is the opportunity to get an increased yield, with the Australian Financial review having recently reported the sale of a one-bedroom unit in Melbourne located in a student accommodation building that sold with a 10.75% gross yield.
There is seen to be strengthening demand for student accommodation as universities expand the number of spots on offer and interest from overseas students grow, and equally many students are helped with financial obligations by their parents and in some cases are able to pay over six to twelve months rent in advance to help offset any risk.
Are you able to finance to borrow for student accommodation?
Yes for the right operators the banks do like this type of accommodation but it does depend on their regular credit criteria and ongoing income. There are two ways of being able to finance student accommodation either as an existing investment, or construction to build a new accommodation complex.
In general, the banks will not consider multi-unit student accommodation as residential housing under their normal policy, but if you are looking at purchasing one unit they may consider it as standard residential if they are able to convert and rent it to standard property. If the property is an existing student accommodation property with multiple units they will consider up to 70% of the properties value, but consider higher case by case.
Also, some governments are offering developers who created student accommodation certain incentives, in the case of the Brisbane City Council they are offering a $13,440 discount for infrastructure and utility charges that apply to units being built. The current charges in Queensland are approximately $18,000 per unit so this can represent quite a big saving.
Why are the banks very conservative on this type of property?
As an investment or asset type student accommodation is seen to not apply to the general market as much as a standard residential property and could potentially be harder to sell. The banks consider these to be specialised security, as there is a limited demographic of people to rent single rooms located near university campuses – being students and also a limited pool of property investors looking to hold and purchase these – as these couldn’t be easily sold to owner occupied or first home buyers.
Student accommodation can also be seen as seasonal because some students may choose to go home at the end of the year or during the holidays and it could be difficult to find tenants during this period. Due to this the income received on student accommodation units could change significantly throughout the year, and a good manager is preferred by most banks to ensure a high level of occupancy is available throughout the year.
What is the downside to this type of accommodation?
In some student accommodation blocks, the on-site management fees can be quite high due to the time that the managers need to spend on the complex and can potentially reduce your net returns. When you are looking at student accommodation you need to investigate the costs before proceeding and calculate net yield as opposed to gross yield before costs.
There can also be language and cultural barriers with overseas students, with over 35% of overseas today from China or India according to the Australia Immigration Departments with a further downside being the international students might be unfamiliar with Australian laws and their obligations and tenants.
What do students look for in this style of property?
In the UK developers have focused on making student accommodation much more desirable to students moving away from ‘slums’ and trying to cram as many students into a property as they can, to creating investor pods or studios for students that offer an en-suite and rooms that are quite luxurious across the city so you may be able to increase your rental yield by providing a higher level of accommodation for the students.
They want to be centrally located, only a short walk to the campus or a quick bus trip. They are also interested in having shared expenses or having all of the bills included in the weekly rental figure as they want to be busy studying, and not worrying about paying bills. They also like to have complete freedom so you may find it hard to rent out rooms where you impose nightly curfews and restrictions on their movements.
So what should I do?
As with any investment you need to consider the net yield and capital growth profile before proceeding. If you want to chase a high yielding property asset then the right student accommodation complex could be for you, but if you are unable to convert back to a normal residential property you might have limited opportunity for capital growth over the longer term. This is because in the case of a normal residential property you would be able to sell to owner occupier buyers later, whereas student accommodation is going to be limited to investors providing a smaller pool of people to sell to.
Ultimately you need to weigh up the pros and cons of the transaction, do your own due diligence and speak with your financial adviser and accountant for them to help crunch the numbers to make sure this type of investment suits you.