Many articles are claiming the death of buy-to-let but they are ignoring a vital sector of the market – the student market. Money Week claims ‘the Government killed the market’, but the Government may have changed what was needed.
The statistics tell us there is a housing crisis in the UK. A shortage of homes with more first time buyers priced out of the market as a result. Prices were driven up by this high demand and due to demand from buy-to-let. The Government's actions were aimed at the buy to let market to make houses more affordable for first-time buyers and new homeowners. However, jobs are no longer for life and new working lifestyles mean young people move companies regularly and with that, location. Young people are not looking to buy a house until they are sure they will settle in that location which means there will always be a demand for rental properties.
There is also the demand from students, specifically domestic students. Internationals tend to spend more on their accommodation and therefore look at private halls rather than private rentals. As many landlords are aware, the rental yields on such properties can be doubled or even more by renting to students. So that leads to the question is buy-to-let dead? Or has the target just shifted?
Understanding The Student Market
Risk vs reward - the underlying principle of all investments. The student market carries more risk in terms of property maintenance, however, much less risk in terms of rental income, especially if you time rental payments right. Students have a guaranteed income in the form of their student loan and, in general, payment should not be an issue, however, by timing the rental payments to fall on the day after this cash injection means you reduce the chance of delay or default in rent.
The average void period for a standard UK property is four weeks. The student market tells a much different story. Student demand is reliable and consistent, providing there aren’t any extreme circumstances like Coronavirus! The void period for student properties is pretty short. Most landlords allow four days to a week for turnaround.
The rental yields on student properties can be doubled or even more. For example, take a three-bedroom semi-detached house with a reception room, dining room and a kitchen. Convert the dining room into two bedrooms, the reception room into a bedroom. The kitchen becomes an open plan kitchen/living room.
- The rental income on this property goes from £330 per week to £660.
- The price of this property is estimated at around £393,000 (source: Zoopla).
- The annual rental (based on 51 weeks allowing for one week of void for turnaround) of £33,660 a year gives gross annual yield at just over 8.5%.
A level unheard of for what is often considered a safe investment! To maximise your investment, you can look up North, where property prices are much cheaper and likely to increase rapidly. In the last 15 years, the average property price (including flats) for York has increased by 296% (source: home.co.uk).
The above example is based on a real house using the exact figures that I rented while attending university. There are plenty more properties where yields are above 8%. For example, Liverpool postcodes L7 and L6 have yields of almost 12% (source: universitybusiness.co.uk).
Student Growth
The number of students at university in the UK currently stands at 2.38 million (2018/2019 HESA). In 2014/15 that figure was around 2.27 million (HESA). There has been a 5% increase in the number of students.
In terms of term-time accommodation, privately rented accommodation (not including purpose-built student accommodation, PBSA) has increased by 10% in the same period. There is a demand for privately rented houses, specifically by national students who often are priced out of the very expensive PBSA. Domestic students look for the balance of freedom, luxuries and cost. Budgets tend to be tighter than international students who are more likely to opt for PBSA.
Buy-to-let is still a thriving market if you invest in the right type of property. The Government wants more people owning homes, but there needs to be a balance to allow for people who do not need to or are not ready to own a property. The new law makes student lets an attractive investment, which is a much smaller market when compared with the general rental market. This means fewer buy-to-let properties which should mean more opportunity for first-time buyers and more landlords willing to take on students. I would argue that this is exactly what the market needed!
Share Your Thoughts. Join The Conversation Below!