As students across the UK are today receiving their A Level results and university acceptances
we refresh our thesis on whether the UK student accommodation market remains a robust investment.
While billions of pounds has been invested by large institutions into 100-500 room Purpose Built Student Accommodation blocks (PBSA ) over the past decade, we continue to believe in the superior returns and risk profile of student HMOs (Houses of Multiple Occupation) which provide accommodation for 5-6 students in a more traditional and intimate environment.
Our proprietary model tracks and analyses 37 key factors to identify the best investment locations in the UK and continues to support deployment of our capital into the student HMO sector.
Here are 8 reasons as to why :
THE DEMOGRAPHICS ARE PAYING DIVIDENDS
The figures support our thesis that the UK student population will continue to grow strongly over the next 10 years.
2020 marks the historic low of the UK 18 yr old population with dramatic growth over the next 10 years. This demographic dividend will continue to increase the student population to 2035.
This is supported by the UCAS data received today showing a 4.8% increase in placed applicants. These numbers will continue to increase over the next month as this years cohort go through clearing.
Contrary to the Brexit doomsayers, the rapid growth of overseas applicants (most notably from China and India) has far outweighed the 50% reduction in EU students following the closure of the Erasmus scheme.
Source : Sturents & UCAS
2. YOU CAN ACHIEVE SIGNIFICANTLY HIGHER YIELDS IN HMOS
Average yields of HMO properties are just over 9% in the UK, some 5% higher than normal buy to lets (see table below). PBSA returns average 4% outside the capital and have been in decline over the past decade. (see chart in point 8).
While you pay slightly more for an HMO Mortgage, 2020 saw new ranges of HMO mortgage products come to market with premiums of around 0.8-1% on BTLs.
Investment returns continue to favour HMOs.
3. YOU CAN HAVE YOUR CAKE AND EAT IT
It is not longer a trade off between yield and capital appreciation.
We argue that with careful research, you can enjoy both high yield and above average capital appreciation. The right project in the right area at the right time will see significant yield compression as the catalysts materialise and more investors are drawn to the area. For example, in 2020 our midlands portfolio posted 16% ROCE and a 10.5% increase in value. Over our 3 years investment horizon we will look to achieve an IRR of 30%+ here.
This is why we spend considerable effort identifying catalysts that cause hotspots around the UK. This works hand in hand with finding the right properties in which to invest, and just as importantly, the right local team to work with.
4. LOWER TENANT ACQUISITION AND OTHER COSTS
The tenant acquisition cost for our student portfolio is under £100 per student. 100% of our rentals this season were done on virtual viewings and word of mouth reviews. This represents under 2% tenant acquisition cost on an average 50 week rental of £5000, which halves if the students stay for more than 1year. [We screen for average study tenure over 3 yrs].
This compares to 8.5-10% for our BTL portfolio (1 months rent to the agent plus voids.)
A balancing factor is management costs which are marginally higher for HMOs - 10% vs. 7% on our BTL portfolio. All costs considered (including ongoing maintenance) our NOI return on the student portfolio is 79% vs. 69% on BTLs.
5. STRONG RENT VISIBILITY
As we look for cash flow certainty, one of the key attractions of the student market is the visibility of income. We have up to 20 months earnings visibility on our portfolio.
This is because our pre-rent cycle starts in the November of the prior academic year, e.g. By the end of Nov 2020 we had pre-rented out all our units for the AY 21/22, (sept 21 through to August 2022) 10 months ahead of actual occupation. Tenure of each tenancy is 50 weeks.
This degree of visibility reduces our cash flow risks considerably vs PBSA (which are rented much closer to occupancy) and professional HMOs (far more transient tenants and 1-3m notice periods.). While we have enjoyed 100% occupancy since the early 1990s, the lead time also allows for any necessary pricing adjustments.
It is also worth noting that standard BTL contracts are moving in favour of tenants with break clauses after 6+ months in England and in Scotland tenancies have been reduced to 1 months notice.
We prefer the earnings visibility of our student HMOs any day of the year.
6. AFFORDABILITY IS KEY
Outside of London, student HMOs are on average £90-100 per room per week (£4500 pa) vs. the average PBSA bed at £165-200 prpw. (£9,000).
Consider then the basic UK student loan maintenance payment of £4,422 per annum, which can double on a means test. You don't need a degree in maths to see the affordability disconnect.
The majority of the UK student population simply cannot afford PBSA irrespective of the bells and whistles of gyms, cinema rooms, pool tables and mixing space.
7. Occupancy & Covenant strength
One of the most common comments I've had over the past year is that students aren't paying their rents so my strategy is very risky. This is simply not true. We had not a single missed payment across our entire portfolio over the past 18 months, and we put this down to the strength in our model. Our portfolio has also had 100% occupancy for three decades.
We are in prime locations for our universities and operate in an affordable price point. 100% of our students have grants making our indirect counterparty the student loan company rather than the individual tenant or even their guarantor. Our model identifies high degree of practical courses that are not "onlineable"; we have robust joint & several tenancy agreements; amazing managing agents who have worked tirelessly to ensure that all tenants understood their rental obligations and that any issues are dealt with compassionately.
Compare this to PBSA occupancy which was 50% in summer term 2020, and overall occupancy at 80% with many rental incentives offered.
8. Attracted by the better risk reward profile, Institutions will compress HMO yields
The student HMO sector remains the domain of SMEs and individual landlords as institutions have found it difficult to deploy large amounts of capital efficiently in HMOs.
They have continued to plough billions into PBSA based on an ill-conceived metric - the student-to-bed ratio (#students to #PBSA beds) which has resulted in PBSA overcapacity in several UK cities (e.g. Sheffield) because it :
ignores the student HMO sector which accounts for 70% of student beds
ignores affordability - it assumes that every student can afford PBSA and
ignores student preferences - it underestimates the "right of passage" appeal of living away from home with a group of friends
A prime example of such blinkered analysis is below.
Meanwhile, PBSA returns are falling dramatically.
It is becoming increasingly evident that Institutions are realising the significantly higher returns of student HMO investments and are looking at accumulating student HMO portfolios. This will continue to compress yields in the space thus increasing the value of your student HMO portfolio, especially if large enough to attract the bigger fish.
We continue to aggressively grow our student HMO portfolio in our identified areas of interest.
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