Student housing has two main types, the first is similar to an HMO but aims at students, and the second is Purpose Built Student Accommodation (PBSA). Both share similar downsides and benefits which should be considered for a long-term property investment strategy. The bright side of this type of investment strategy is that it generates a dependable income cycle as the student term is set at the same time and for the same period. Likewise, it makes sure that annually there will be consistent steam of tenants. However, as with HMOs, there are also some dark sides linked to the benefits which make this investment unsuitable for many investors.
The dark side of Purpose Built Student Accommodation is that there will be a void period every year that will be difficult for you to fill. This is the particular case of PBSA property which can not be rented out as a normal buy-to-let. Likewise, when you rent out your property to students, it is more likely to result in more wear and tear or maintenance issues. Purpose-built student accommodation tends to mean new-build blocks of small, one-bed apartments particularly designed for students.
There is a shortage of residential property in the UK and students are asking for more accommodation. As such, students are increasingly living in PBSA, where on the one hand, they are putting strain on the local housing stock while on the other hand enjoying the benefit of living somewhere where they have a bathroom and kitchen for themselves, their accommodation is fully furnished, their bills are included in the rent, a common area, there might be a gym, and there are staff to help them when they need.
As an investor, PBSA works like a serviced accommodation. The investor buys one or more flats in the building and pays the management company that is in charge of that building to manage everything. The management company on your behalf will find tenants, collect rent and deal with other issues like maintenance, etc. These types of properties are relatively cheap and in great locations of have high demand. It is also important to understand that you will need capital to buy them outright as they cannot be mortgaged.
Purpose-built student accommodation can generate great yields as tenants are lining up well in advance of their tenancies and they often pay the landlord in advance. But, despite the PBSA being hands-off, still, the landlord must do their due diligence when they buy. Demand for the PBSA is high but not the same everywhere. It is important to conduct research about the trend of the demand for PBSA in an area you are looking to invest. You will also need to consider the desirability and performance of the universities near the development and predict the future population of the students that live there locally.
You need to work on the exit strategy too. PBSA investment is still niche and you will be limited to only cash-buyers for selling it.
Given all the points, Purpose Built Student Accommodation is a growing market. Income is more certain in PBSA as students pay the rent from their student loans and the yearly turnover of students means you will be able to plan because you will always know when new students are arriving and old leaving.
It may sound strange but renting out property to students involves lower risk than renting out to professionals and students don’t expect much from their accommodation. They don’t demand the latest kitchen accessories or appliances to entice them to use your property. However, wherever you invest, be careful. Be careful to invest in the cities where universities provide on-site accommodation at subsidized prices or at affordable prices, so check before you invest.
Pros of investing in PBSA
- High-demand offering – this type of property is specially designed to fulfill the demands of today’s student rental market, therefore, it has the modern design, amenities, and layout students are willing to pay a premium for.
- Better location – Generally, PBSA requires less ground space to build multistorey, that’s why, usually, the developments are built in prime city-center locations close to the university, increasing the prospects of high yields and capital growth.
- Rental guarantee – with new properties, often credible developers offer a rental guarantee period, reducing the risk of investment to a greater extent while the development also establishes its reputation in the local market.
- Building management – Most PBSA has building management, security, and maintenance, giving investors a hands-off, hassle-free experience.
- Off-plan investment option– if you are looking to invest off-plan, you can do it in student property. It gives you the benefit of below-market rates and possibly capital appreciation over the build period.
- Stronger retention rate – comparatively speaking, PBSA has a higher retention rate than Student HMO, as students tend to have more positive experiences of living. PBSA encourages a sense of community and mutual understanding among each other, making tenants more likely to stay longer once they start to know each other and develop a sense of friendship. Gradually, they treat the building as a home.
Cons of investing in PBSA
- Capital growth factor – There is no denying the fact that PBSA generates higher rental income than residential investment but its capital growth may not grow as high as residential property. However, it is expected that PBSA is cheaper than residential property.
- No option of mortgage – There is no option to get a mortgage on PBSA, meaning investors pay the costs upfront.
Purpose-built student accommodation is a trade or investment?
Purpose-built student accommodation is a long-term high-income investment. It works well for those investors who are looking to invest for a high supplementary income from a nuisance-free fully-managed buy to let property. PBSA is a perfect investment for investors that want a steady income and high yields. Over the last ten years, there has been a significant increase in the popularity of the PBSA market. There are a few reasons behind its increasing popularity that include:
- The international reputation of higher education in the UK sector, meaning the market of the UK was less affected by macroeconomic conditions.
- The increasing number of students enrolling for HE reflects that PBSA is a substantially more stable revenue than other forms of development.
- Due to the reduced risk profile, PBSA offers lower yields than other development opportunities.
- It involves less effort and less time consumption as it can be handed over to a management company as it is hands-off property.
Tax process of purpose-built student accommodation property
Student accommodation properties fall into two broad categories, ‘purpose-built student accommodation’ and ‘student houses’. Student houses are ordinary buildings built and designed for use as dwellings by households and families, but at some point in time these happen to be used as a house in multiple occupations by unrelated people who happen to be students. Purpose-built accommodation is a type of accommodation that is within the block which was mainly built for students.
Disposal of student houses is subjected to non-resident CGT like any other houses, whereas purpose-built student accommodation is excluded from liability. A building is not considered to be used as a dwelling for a tax year if it provides accommodation that includes:
- Having at least 15 bedrooms
- Purpose-built for student occupation
- Occupied by students for at least 165 days in the tax year.
Therefore, ‘purpose-built’ includes conversion. Accommodation is for ‘occupation by students’ if it is mainly or exclusively occupied by persons to undertake a course of education. ‘Mainly or exclusively’ means more than 50%. In addition to it. A building is not considered as used if it is occupied by pupils controlled or managed by an educational establishment etc (within Housing Act 2004/sch 14/ paragraph 4). This includes buildings covered by provisions in Northern Ireland or Scotland because these areas have been designated as ‘corresponding provisions’ by HM Treasury.
If a property does not fall under any of these categories, the legislation does not affect it and it is automatically considered the property to be ‘used or suitable for use as a dwelling’ for non-resident CGT purposes.
Who can invest company or individual in PBSA?
Purpose-built student accommodation refers to accommodation that has been particularly built for students to live in when they are getting into the universities of the UK. Typically, PBSA offers a range of facilities to students to cater to their needs such as communal areas for studying and socializing, secure access, and laundry facilities. Often private companies or investors offer PBSA who see an opportunity to provide high-quality, purpose-built accommodation to fulfill the increasing demand of students for accommodation.