Student housing continues to perform well as an asset class with higher yields than both residential and commercial property.
Easing the housing crisis
With much of the national housing debate focused on a shortage of supply and the ongoing inability of housebuilders to deliver larger volumes, it is worth considering how the student accommodation market could help to ease housing constraints in major cities and towns across the country.
Student housing is an established alternative property investment class that behaves more like commercial property (yield driven investment) but can still have exposure to the housing market (direct lets). With the ability to deliver at higher densities, it has all the hallmarks of the type of housing delivery that the Government is trying to encourage through build-to-rent with the exception that it has a proven track record.
The rise of student HMOs
An overlooked element of the housing supply crisis is the role of the rapidly expanding higher education sector; according to HESA the number of full-time students in higher education grew by 540,000 between 1999 and 2012, an increase of 46%. With university halls of residence just about able to cope with the increasing numbers of first year students and private sector student accommodation operators racing to scale up, most students ended up in the private rented sector.
The growth in student numbers combined with the introduction of buy-to-let mortgages in the early 2000s and ever increasing house prices meant the role of student landlord was irresistible for many: be it an entire street or a single house for a son/daughter and their friends.
Summary – An overview of the market
The conversion of family housing into student HMOs has been an important but under-analysed feature of the housing boom and now offers an opportunity for councils and developers of student accommodation to contribute to the easing of the wider housing market supply crisis.
We have identified 66,000 properties across England and Wales that could be freed up for family housing which would trigger the creation of an additional 260,000 student beds.
Following weaker rents during the 2012-13 academic year, we are forecasting total returns of 9.3% for the 2013-14 year with static net initial yields at 6.3% and rental growth of 3.0% due to improving demand.
An update of our university town/city ranking model puts Bath, Brighton, Bristol, Cambridge, Cardiff, Edinburgh, London, Oxford and St Andrews at the top of the list for investors.
The student housing market has proven a resilient and stable investment during the downturn. Following the yield compression of the early to mid 2000s, average yields hit 5.75% in 2007, rose to 6.4% in 2009 and were 6.3% in 2012. Within the average yield there is the opportunity to take different levels of risk with yields generally lower in London or for halls with lease/nominated rights compared to those that are direct let and in secondary locations.
As house prices rose, equity became more important in accessing the housing market. With students moving across the country in large numbers, investors followed suit and this lead to an increase in the mobility of equity, doing its part in turning the boom into a national event.
This increased mobility of investors’ equity began to prove too much for local market participants as investors out-bid families for larger housing and young professionals for small flats in towns and cities across the country. This drove previous occupiers away in search of more affordable and less competitive housing markets and led to the formation of what some would consider to be student ‘ghettos’. Examples of high density student areas include Clifton/Redland in Bristol, Oldfield Park in Bath, Jesmond in Newcastle and Cowley in Oxford.
This situation has only worsened since the beginning of the credit crunch as the withdrawal of higher loan-to-value mortgages, growing rents and a lack of alternative investments have continued to attract investors into the student private rented market. This has been at the expense of other less equity rich potential buyers while students have also priced-out many in the private rented sector due to a willingness to over-occupy accommodation and deliver higher rental yields.
A viable opportunity
Until now, much of the growth in student accommodation has been focused on the higher value and growing international student market but there is the opportunity, with both a carrot from the developers/operators and a stick from local and central government, to target the 500,000 students living in the private rented sector.
Local authorities could unlock a substantial supply of lower density family housing in central locations while still meeting the higher density and viability requirements of the current development environment by allowing the provision of more student accommodation.
From a council’s perspective not only would this help with the housing supply issue but it could also add to its council tax revenues.
Households containing only full-time students are exempt from paying council tax and so switching to a new council tax liable occupier would result in on-going payments on the existing property and six years worth of payments through the New Homes Bonus on the newly constructed student housing.
Indeed, many local authorities have already realised the impact of students on their local housing markets and revenues and are consulting on and enacting Article 4 Directives (of the Town & Country Planning Act) to restrict the new supply of Houses in Multiple Occupation (HMOs) in markets with already high concentrations of student households.
If they prove enforceable, the use of Article 4 Directives without the provision of new student accommodation is likely to only displace demand into surrounding markets or even increase overall housing demand as larger households are split into smaller ones.
Therefore, it is important that councils recognise the need to provide alternative desirable student accommodation to counterbalance any displacement of demand while also taking care not to damage the housing prospects for young professionals struggling with the unaffordable housing market.
Identifying the opportunities
According to the 2011 Census there were 132,000 full-time student households across England and Wales housing 500,000 people and we have identified those markets that contain high concentrations of larger sized properties and student households at the expense of families (data for Scotland has not yet been released and so we are unable to include it in this analysis).
From this analysis we have identified a potential 66,000 properties that could be freed up for family housing. This would necessitate the creation of an additional 260,000 student beds across the country.
Two thirds of this unlockable supply is in the top 25 towns and cities and would be equal to 1.8 years worth of recent supply but the scale varies by location:
- In Bath, the provision of student accommodation could unlock 1,100 homes, which is equal to three years of recent housing delivery and £1.4 million in additional council tax revenues per annum, excluding any New Homes Bonus.
- In Oxford it could unlock 1,400 homes, which is equal to five years of recent housing delivery and £1.8 million additional council tax revenue per annum.
- In Newcastle it could unlock 3,300 homes, which is equal to eight years of recent housing delivery and £3.2 million additional council tax revenue per annum.
- In Bristol it could only unlock six months worth of supply but this is still 1,400 family homes and £1.6 million in additional council tax revenues per annum.