Lets face it, some property investors have a problem with purpose built student property (PBSA) investments. Here are the most common objections:
- Tenants are restricted to students only (usually by covenant).
- There’s seemingly a restricted secondary market so how do you sell up when you need to?
- There’s no control over the running of the property.
- These guaranteed rents being offered are just paid directly from inflated purchase prices.
Hands-up if you recognise at any of those?
Truth or urban myths? Lets take a look at each of these comments in a bit more detail.
Tenants are restricted to students only (usually by covenant). That is indeed usually the case, but for good social and business reasons, and to the benefit of the owner. One key reason that PBSA is so popular with today’s demanding students is that they offer a safe secure community of like minded individuals. That’s why rents are higher and often demand exceeds supply when in the right location.
You can’t sell PBSA apartments on. This was perhaps the case, or at least a few years ago when the asset class was emerging and the secondary market untried. The worry was that PBSA would be a flash in the pan and owners would be left with property that no student wanted and that no-one else was allowed to occupy.
That worry has proved unfounded, provided property buyers were careful to select the right development in the right location. Exactly the same level of buyer research is needed here as with choosing any residential investment property, it really is no different. Fundamentally the problem is when unwary investors are led to confuse passive investment with passive research.
What I mean by this is that the promise of hands-free property ownership does not imply there is less work to do when choosing which PBSA property to buy. It seems obvious but inexperienced investors can have their heads turned by over-zealous and perhaps less-than-well-informed sales and marketing. And this is compounded when buying off-plan when computer generated images are relied on to some degree to make a purchasing decision. But find a good reputable independent broker and help is at hand.
Today there is a proven track record in the resale market amongst the best developments, and with rents increasing from the second year, a decent capital gain can be made in a short space of time. There is now an established local and overseas investor market for UK PBSA. Because they are hands-free this is a great asset class for overseas buyers. The secondary market has arguably an even wider appeal than the initial one.
There’s no control over the running of the property. Managing a PBSA is a specialist activity and involves decisions that affect the entire development. Letting the experts do what they do best is really the power of this asset class. that’s why researching the facilities management company before investing in a PBSA is crucial. Again an experienced broker will help massively with that. Such facilities managers charge a relatively high level of rental income percentage (around 20% of income), but this covers everything from routine maintenance to finding tenants compare this with the combined costs of running a rental apartment. And gross yields are usually much higher than standard residential lets, meaning your net income is way higher and without all the hassle.
What about guaranteed rents – aren’t these a number-juggling exercise? Assured rental income for the first few years is very common in PBSA and do offer the advantage of a secure income in the early years of a commercial property in operation. They also make sound commercial sense for the developer. A benefit to an investor is that it smooths the ramp-up of rental income and occupancy to ensure positive cash flow from day 1. A good location should expect to see actual net rents in excess of the guaranteed figure within a couple of years, so the developer can retain the excess in the latter years of the guarantee period, after which the investor gets to enjoy those benefits for themselves.
With the best of breed PBSA’s the rental income will usually exceed the guaranteed figure from opening day. Whilst this can be slightly irksome to the investor at first, it shows they have backed a winner and they will receive greater rewards in the years to follow. So with the well-chosen development everybody truly wins.
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