For a relatively modest cash price, you get a stake in the property market in a top university town and a guaranteed income – all without the hassle of having to manage a buy-to-let. That at least is the sales pitch for a Student Pod (PBSA).
So what is the real story on this latest buy-to-let vogue where investors buy a single room in a development? What many investors don’t realise is that there is no established resale market for the PBSA Market.
The vast majority of student pods have been sold at a premium with staggered purchase payments and guaranteed yields for anything up to 10 years. After these grace periods, there is no guarantee of a ROI and without these assurances the purchase of a PBSA will be much more speculative.
Student pods are not considered to be individual properties and therefore cannot be bought using a mortgage. While it is not impossible to obtain finance to buy a student pod, it will not be through a traditional buy-to-let provider, so you will be unable to get any of the leading buy-to-let rates.
Most student pods are sold ‘off plan’ – before they are complete and in many cases before construction has even started – and come fully managed. This means investors are exposing themselves to risk on two fronts ‘development risk’ and ‘management risk’. For example, the development may not be finished, or the developer may not have the skill or experience to manage the development and if they do how much will they charge for their services.
Student Pods are traditionally larger blocks and run by a management company. If block occupancy is low, the investor has no control, to ensure tenants are in his pod. Investors in Student Pods have no control over the annual charges and are tied in to using one management company, so they have no control over costs.
Another concern is the ‘rental guarantee’ offered by developers. This can often be an overstatement. The guaranteed rents are attractive to investors, but often they fail to materialise. I believe that investors are actually subsidising the guaranteed rent by paying an inflated price for the unit they secure.
There have been a number of student pod schemes that have stopped paying out the guaranteed rents soon after completion. Investors have then discovered that the real market rate for the rents is much lower, reducing their yield. This has left them with an underperforming asset that is difficult, if not impossible to sell at an acceptable asking price to the investor.
Finally, the exit strategy. With a normal buy-to-let you can sell the property at any time on the open market, through a reputable estate agent and expect a reasonable capital appreciation. However, selling a student pod will encounter problems. For example, Student Pods are leasehold and as such a diminishing asset. So who decides the market value? As a piece of real estate per sqm it is very expensive (double the average market value), there is no established resale market. Who will sell it? Is it an investment, or is it a piece of real estate?
So what is the alternative to a student pod? Well you could consider buying a HMO as you can apply for a mortgage and there is a buoyant market for this type of student property. A Mistoria HMO offers a 9% PA return of investment from day (this is not a projection). PBSA yields are traditionally guaranteed by the developer for the first 5 years (although the actual annual return from day one is less) to ensure that by year six, the investment will potentially produce 9%. This is subject to current market trends of an annual rent increase of 3% remaining constant. However what is not mentioned is management costs will also rise by which will negate any rent rise.
In contrast, a HMO should be yielding a 10.5% ROI (based on the same predicted 3% annual rent increase used by PBSA). While the vast majority of Student Pods pay the investment yield quarterly in arrears, Mistoria pays monthly (or as the rents are paid).
There have been several recent high-profile cases in which student developments haven’t delivered as promised. Last November, Liverpool-based Middle England Developments was put into administration by its owner, property developer Nigel Russell, with debts of £3m.
The firm had sold individual pods to investors for about £50,000, with ‘guaranteed’ returns that failed to materialize.
In spite of the poor investment record of Pods, student accommodation can offer a number of attractive features to investors – yields are high as students settle for less space than other tenants; occupancy is typically high; and it is neatly counter-cyclical, as more people go to university during economic downturns. Student housing is increasingly a global asset class.
So my advice to investors is to take a long and hard look at Student Pods. Then compare their performance/ROI/exit strategy with HMOs. In my opinion, there is no competition!
*Mish Lyanage is Managing Director & CEO of the Mistoria Group
This story first appeared on Property Investor Today on 25th June 2014