Getting a top mark – investing near universities
Whether it’s just owning an apartment nearby a university or even investing in contracted student housing, investors can benefit from good yields and steady demand. But there are other factors to consider before you head into this market.
It’s been tempting of late to search for a recession-proof investment to carry one through tough economic times.
When unemployment rises and recession nears, traditional high rental yield earners of the past in the property market may no longer be such a reliable a source, especially in the high end.
There is a rental sector where it’s impossible for your tenants to lose their jobs and where demand remains usually steady, however – student housing. If gone about carefully, it can return higher yields and a steady demand that is not likely to significantly wane. Foreign students studying in Australia have perhaps made the largest impact lately in increasing this demand.
International enrolment last year went up by an average of 20.7% over the year earlier, according to government figures. This year, some universities are reporting up to13% increases in overall undergraduate acceptance rates. Taken in a larger context, international education contributed $14.2 billion to the economy in 2007-08, making it Australia’s third-largest export. The commodity of an Australian degree for Asian students is regarded in particular at a lofty level, and often at a significantly lesser price tag than universities in the US or UK. Some 79% international student enrolments came from the Asian region in 2008.
All these new students coming in have to live somewhere, naturally. While some on-campus housing is provided, many others live off-campus, either by choice or necessity. In Brisbane, for example, 47% of students are housed in share accommodation, with only 15% on campus, 13% living with friends and relatives, 18% in staying at home, and 7% purchasing their own property, according to Damian Haber, Principal of Queensland-based The Pad Management Pty Ltd. He says it reflects a trend towards more affordable housing.
“Often it is the case that new purpose built or on-campus accommodation is very high in cost and beyond the capacity of many students to afford,” he says. “A share accommodation provides a great alternative at a more affordable price range, hence the extent of its market share.”
That’s where investors come in, and many have already sought this specific field of housing which can provide great gains, as well as risks. Less than three years ago, student accommodation was not commonly out there in the marketplace, or even considered, says Haber, who also serves as President of the Student Accommodation Associations Industry.
“In more recent times, with the advent of the international student market and response from China and India to strong marketing by our university sector, as well as the push for high returns, student accommodation is now a household name and often filling the boards of real estate sales agents as an attractive investment strategy,” Haber says.
Greater yields, stability
One of the main reasons an investor might now choose student housing is for the yields. Investors in student accommodation can pack more income per square meter than they might with professional tenants. For example, one can turn a two bedroom unit into a four bedroom unit, or a three bedroom house into a five bedroom house.
“You can get quite a lot of tenants in one place, so the rental income is higher,” says Chris Gray, CEO of property portfolio company Empire.
Haber says student accommodations typically should return an income yield of between 6% and 8% for inner city residential, compared to what he says would be a 3% to 5% yield for comparable single tenancy arrangements.
No matter the location, the yields for student accommodation are almost always higher compared to renting to non-students. Gray says he knows a mortgage broker who recently turned a one bedroom house with a sunroom into a three bedroom, and now gets a 12% return.
That increased yield is just one of the many advantages, however. Haber says the latest increase in international students helps explain why just 10% of them have cars. With that in mind, student accommodation does not usually need a car space, unlike many single residence properties.
Another investment benefit is that student housing is often much cheaper than other similar housing nearby, says Gray. “It’s a low cost of entry,” he says.
If managed well, vacancy rates can be low, as well. Haber says The Pad puts students on a six month fixed term tenancy, but many students stick around for two or three years, he says. “Our tenancies run in blocks, which eliminates any potential vacancy over holiday periods,” he says. “We typically have a waiting list of students ready to move in if a vacancy arises and the universities are constantly in contact wanting to place more students.”
Having multiple tenants also can limit risk for vacancies. By diversifying the rental across multiple tenants, it means that if a tenant leaves, the income is still coming in and still typically above a single tenancy arrangement in net terms. Further improving this strategy would be to have a staggered entry profile, says Haber, thus likely ensuring income at all times, even when one tenant might be lost. “With a single tenancy arrangement, if the tenant does not renew, the entire income from the property is lost,” Haber says. Investors can really benefit by discussing their level of risk tolerance and mortgage repayment options.
See: Home loan calculator
Sometimes, just having three tenants of four possible in place is enough to still be profitable for an investor in student housing. The fourth tenant is just an added bonus.
Read more at Your Investment Property magazine.
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