UHY Hacker Young | Chartered Accountants

Changing by degrees – The student lettings market

16 May 2019

For decades the student letting scene has been typified by the standard family dwelling converted into bedsits. Recently several trends have combined to make this arrangement less attractive to investors.

A popular investment

People like investing in property. According to data released by HMRC in January there are 1.5 million private landlords in England (probably about 1.75 million in the UK as a whole). Of these about one half own only one property each. Various factors have contributed to the popularity of this type of investment, including low returns on bank and building society deposits, greater availability of mortgages and rising house prices.

The average yield on a single occupancy property (one occupied by a single family) last year was 5.8%. Although this is a reasonable rate of return for a relatively low input of management time, many landlords have been attracted by the average yields of 10.2% obtained on ‘houses of multiple occupation’ [HMO]. These normally comprise four or five self-contained units variously known as studios, studio flats or bedsits, each of which will have a bedroom, living-space and kitchen, but share toilet and bathing facilities with other tenants.

High rise

In university towns and cities this type of accommodation has always been popular with students, due to the relatively low rents. And there has rarely been a shortage of student tenants. Between 2001 and 2017 student numbers have increased by 21%, from 1.9 million to 2.3 million. Accompanying this growth is a gradual move away from private rented accommodation to Purpose-built Student Accommodation, [PBSA] also known as private halls of residence.

Source: Higher Education Statistics Agency

Universities tend to offer accommodation in their own halls of residence to first year students and then encourage them find their own in subsequent years of study. The trend in students using this type of accommodation is flat, remaining at about 19.3% of all students. Meanwhile the use of PBSAs has risen from 7% to 8.2% and the percentage using other rented accommodation has fallen by nearly 2 percentage points.

Home comforts

The image of the poverty-stricken student scribbling away in his freezing garret is long gone. PBSAs are favoured over HMOs due to their self-contained en-suite comfort, and the concentration of many students in one building engenders a studious atmosphere while at the same time benefiting social life. The rent can be up to 90% more than that of an HMO but today’s students are prepared to pay. Moreover, this country has some of the world’s best educational institutions. These attract paying students from many other countries, so that in 2017/18 431,000 foreign students occupied places in UK universities. These students tend to be better off, and expect a high level of comfort.

Private landlords under pressure

We can add to these changes the political and fiscal pressures exerted by government on private landlords in recent years: restriction of mortgage interest relief to basic rate tax, higher rates of Capital Gains Tax on residential property, increased stamp duty on ‘second homes’, and the need to obtain licences for large HMOs. As HMOs have become a less attractive investment, large institutional investors have seen opportunities to build more PBSAs. Some of the advantages are obvious: exemption from the 3% stamp duty surcharge on multiple dwellings, reliable and predictable income streams, relatively easy administration and returns good enough to allow management to be outsourced to specialists. The last four years has seen a rise in the number of students living in such accommodation from 118,000 to 151,000, and in 2017 there were 287 new developments. However, investment in PBSAs is not spread evenly across the country. In Edinburgh, Glasgow and Newcastle, for example, these are quite rare, but Manchester, Sheffield and Nottingham have seen massive investment in the sector and there is anecdotal evidence of many private landlords divesting or converting their houses back to single family occupation.

Owners of HMOs in cities where PBSAs are grabbing a bigger share of the market need to plan for a more challenging future. Some will consider selling their existing properties and investing instead in PBSAs. There are however barriers to entry, the first being a potential capital gains tax liability on the sale of the existing property. The second is that mortgage finance is more difficult to obtain for PBSAs than for buy-to-lets. Nonetheless, there seems to be plenty of scope for student numbers to carry on rising and for students to continue to demand better quality accommodation, so for those with cash to spare PBSAs will continue to be a good investment.

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