In order to provide accommodation for the ever expanding student population, major university cities across the UK are seeing an influx of student pods.
Investors are buying the pods or studios, many of which have en-suite rooms in new modern city centre buildings, complete with gyms and cafés from developers for as little as £40k.
The investors are being promised a ‘rental guarantee’ for a set number of years, with management of the property and finding tenants taken care of.
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Student pods in the North West are on offer from £50,000 and investors are promised guaranteed returns of between 8%-10% for five years. In London, investors can buy student pods in Greenwich from £82,500 with 10% guaranteed income in year one and projected returns of around 9% thereafter. There are many more examples like these all over the UK.
Jerry O’Brien, Senior Manager at The Mistoria Group, had this to say: “Recently, we conducted research amongst 100 second year students and over 95% said that they would not consider living in a pod, when higher quality accommodation is available, at a more affordable price.
Without doubt, the monthly rents of student pods are often over inflated. These pods are marketed to investors with the promise of a 8-10% annual return, on a relatively low capital investment. This return is usually based on an annual rental rise of 4% and monthly rental income of between £150-£160 per month. This annual rent increase is unrealistic, because if you remove London from the stats, then annual rent rises are between 1-2% on average.
Over the last three years, we estimate that between 15,000-20,000 investors have purchased student pods in the belief that they will make good returns on their investment. In reality, the student pod market will implode as investors will soon discover that the returns are not what they were promised.
In fact two years ago, the Hong Kong Government banned the construction of student accommodation as they were failing investors. There have been a number of student pod schemes that have stopped paying out the guaranteed rents soon after completion, and investors have then discovered that the real market rate for the rents is much lower, reducing their yield.
This has left investors with an underperforming asset that is difficult, if not impossible to sell, at an acceptable asking price to the investor.
Just a couple of months ago, Middle England Developments (MED), a Liverpool development firm at the forefront of the buy-to-let student property went into administration, with overall debts to creditors estimated to be as high as around £3m.
If you want to invest in student property, you are better off buying a HMO (House in Multiple Occupation) property, which can provide an 8% minimum cash rental yield and a typical 13% total cash yield, including 5% capital appreciation. Unlike student pods, you can apply for a mortgage and there is a buoyant market for this type of student property. If you are building a portfolio, you can lend on your equity in the HMO to fund further investments.
Student pods are not considered to be individual properties and therefore it can be difficult to secure a mortgage. What’s more, 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, 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?”
