A University education can bear fruit for Property Investors
There has been much speculation as to the impact the rise in university tuition fees will have on UK society but very few people have considered another potential casualty of this change - the buy-to-let sector. Will there still be enough students to support this market? What pressures are facing landlords as they fight for their share of this potentially lucrative sector? Can private landlords survive this social change? All questions which need to be answered.
Firstly, it is important to realise that rising tuition fees will not stop people from going to university. The Government is aiming to get 50% of school leavers in higher education by 2010 and with A-level students achieving new record pass rates every year (2005 pass rate of 96%, 22.4% grade A), more and more people are likely to be fighting to gain places at higher education institutions. In fact, students today number over two million, so it would seem that landlords targeting this sector are definitely not going to suffer from the lack of demand.
However, the introduction of top up fees in addition to tuition costs already in excess of £1,100 per annum plus a greater awareness of debt means that students will be more cash aware than ever before. This could mean that despite the recent growth in demand for ‘top end’ student apartments in places such as Manchester, the fiercest competition will be for the cheapest properties.
One problem this intense competition for cheap accommodation will cause is the ‘ghetto-isation’ of certain communities as students flock to affordable areas close to their campuses. This trend has already been highlighted in the media and is a growing concern, in terms of security and property value, for many residents in university towns.
While residents are worried about the impact students will have on their communities, landlords have capitalised on this phenomenon by increasingly purchasing in these areas. However, they are not alone in taking note of this trend and it has lead to certain universities actively seeking to take more control over the housing of their students, which means individual landlords face greater competition for tenants.
One way in which universities are combating their housing problem is by encouraging students to live in large purpose built blocks. These flats will typically be close to amenities and provide students with easy access to what they view as one of the most important aspects of university – a good social life! If these schemes become more widespread, they are likely to seriously challenge the hold that private landlords have over this sector and will require them to become increasingly creative to fill their properties.
One way in which private landlords will be able to fight purpose built blocks encroachment onto their territory, is to offer something that they can’t – a sense of community! By choosing to invest in a four-bedroom house rather than a flat and actively marketing it as a great place for a group of friends to live, investors can gain the upper hand.
However, the fact that universities are taking control of their students’ housing is not all bad news. Some higher education establishments will take out the lease on a private property and then sub-let it to students, through the university housing service. They will then take on all responsibility for the property, providing the landlord with a low maintenance option. This can even help their investment to be more rentable, as it can be seen as a seal of approval from the university that has taken it on.
Also, as many students try to cut down on their costs this may mean that they want to live in larger dwellings so that bills can be spread across a greater number. Whilst this can mean higher yields for landlords, it may also carry the possibility of extra charges.
On April 6th this year the Housing Act 2004 came into force and with it the implementation of the Housing Health and Safety Rating System aimed at improving conditions for private rented accommodation. In practical terms for landlords they need to be aware that if they own, or are seeking to purchase a three-storey property (or a two-storey property including a basement if it is occupied) with the intention of renting it to five ‘unrelated’ tenants they will have to apply for a Homes of Multiple Occupancy (HMO) license from their local housing authority.
The license is valid for five years and the fee will be set by each individual local housing authority and could easily exceed £1,000. Landlords, as well as needing to be able to prove that their properties are fit and proper, will also need to provide basic facilities for their tenants. These are, that for every HMO there is one bath or shower, one lavatory and one kitchen. These are facilities which would hopefully be in place anyway – and any broker advising his or her client should suggest that these are in place in order to make the property ‘rentable’ and so as not to have any void periods, thus denting their profits.
A landlord needs to be aware that he might have to be licensed in order to rent out his or her property. It is also an important factor to take on board when considering improvements to the property such as a loft conversion, as the increase from two storeys to three and potential extra rooms could leave the landlord open to these licensing demands, as well as extra building regulations.
The legislation also refers to ‘unrelated’tenants. In this case it might be worth advising your prospective landlord that they should advertise / rent out their property as a single unit rather than as multiple units within. By doing so, and ensuring that one tenancy agreement is signed by all rather than single agreements being signed should show that they are ‘related’ tenants, and therefore exempt from the legislation and charges incurred under it.
Whilst some industry pundits have shown a great deal of scepticism on the issue it should be remembered that the buy-to-let landlord is essentially providing a product to a consumer and all measures to improve the quality of these can only be a good thing in the long run even if it means some financial obligations at the outset.
As the saying goes, forewarned is forearmed and one of the best ways in which anyone can survive social change is only to make a move from a position of knowledge and understanding. Therefore, prospective landlords need to be aware of any particular hotspots around university towns they are targeting. For example, certain areas in Nottingham and Newcastle see high competition for the more desirable properties in the more fashionable suburbs. Choosing the right area can mean the difference between a steady rental income or having to discount the rent to attract tenants.
But it isn’t only the professional landlord who is targeting the properties in these towns but the parents of students as well! Many people with sufficient equity in their main residences have done the maths and realise that it is potentially cheaper to purchase a property for their children while at university and rent out the excess rooms.
This has some clear advantages, as the owner’s child can act as an onsite letting agent putting a stop to behaviour that could damage the property. In addition, they are also likely to choose friends as flatmates so their parents have the comfort of renting out the property to people they know.
What marks these two classes – parent and professional landlord - apart is the length of time they will spend in ownership of the property. Whilst a student’s parent is only likely to retain ownership for the duration of their child’s time at university and not much longer afterwards, the second class will not be affected by this, and may see their foray into buy-to-let as a more long term investment option.
In conclusion, this market is one that is changing as larger institutions seek to cash in on growing numbers of students in need of rental accommodation. There are also legislative changes, which landlords need to be fully aware of and make sure they are covered if they need to be. Without this, they could find that their buy-to-let investment is a financial drain rather than the boon they were hoping for!
So whilst there are plenty of students who need roofs over their heads, there are many challenges and growth potential for the private landlord may start to diminish over time due to increased competition. Therefore, landlords need to invest intelligently and be more creative. Flats are out and houses are in and there must be effort on the part of the landlord to differentiate their product from all the others.
All in all, an exciting and challenging time to be in this market!
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