10 May 2010

Getting a Top Mark – Investing Near Universities

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.

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.

More people, more hassle

There are some property experts who don’t look so favourably on student housing. Many property experts actually discourage the venture from investors. “Don’t do it,” says Peter Koulizos, property investor and author of The Property Professor’s Top Australian Suburbs. “The extra rent comes with a lot of hassle.”

Koulizos takes this view from fresh experience, having bought a house three years ago in Adelaide and renting it for student accommodation with four rooms. He says in Adelaide it’s not uncommon to get $160 to $180 per room from students. That often leads to a cash positive investment, but also with more work done by the owner.

“I needed enough rent to help pay the mortgage when there were 9% interest rates, but now that interest rates are closer to 5%, I’m not going to be reletting it as student accommodation” says Koulizos. With interest rates nearly halved in seven months, he says he doesn’t mind taking in less rent because his overall financial picture is similar.

One of the greatest challenges for Koulizos in the past three years was dealing with four tenants. “It’s four different personalities,” he says, noting these are people who often haven’t lived away from their parents before. Conflicts between tenants who often don’t know their flatmates ahead of time, as well as prematurely ending leases due to homesick students, are not uncommon.

Another concern many investors have, whether founded or not, is that students are more likely to trash things. “In general, other (non-student) tenants will look after the property better,” says Pamela Yardney, a director with of Metropole Investment Strategists in Melbourne. “And once those properties become run down, they can become the slums of the neighbourhood.”

Unlike other tenants, students usually require supplies such as utensils, linen, towels and kettles. Each room door should have its own lock as well, and added security is especially coveted by female student renters. The furnishing is a bit like what you’d find in a holiday accommodation, but with added security measures, says Koulizos. “It’s not required, but if you’ve got a student that landed in January and needs to study in February, and they’ve got a choice between you’re unfurnished property and one that’s already done, they’re more than like to choose the one that’s already done.” The easiest, most convenient option at an affordable price will almost always win out.

Koulizos, who lectures about property investing, concedes there are others who don’t mind the added work as much as he has, and continue to invest in student accommodations. “Many of my (property investment) students rent out places for student accommodation and they love it,” he says. “When you look at it on paper, it all looks fantastic. There are headaches that come with it, but if you’re prepared to handle those hassles, it’s great.”

Haber says the perspective of Koulizos and others that student housing can be more troubling than other single occupant housing is not always the case. “Student tenants are typically of a very high quality, with a strong purpose to study,” he says. “Through good management, a positive studying environment with like minded high standard tenants, the concern of increased turnover is addressed.”

Many of the hassles can also be taken out of the hands of the investor through the hiring of a property manager.

Capital growth can be limited

But there are more than just hassles that can detract from a student accommodation investment. There’s also an assumption by many investors that capital growth is limited.

“Capital growth may be limited because tenants may only pay up to a certain level,” says Gray. “More people are buying on the rent returns, rather than the property’s value. If rents don’t rise, then potentially the property’s value will not either.”

Yardney says investors should always keep capital growth in mind for a longer term strategy. “(Student housing) is a cash flow play, but you’ll never get your capital growth to buy your next property,” she says. “It panders to people’s concerns for cash flow, but you don’t have that problem with other properties right now anyway.” As interest rates drop, rental returns have increased for all properties, sometimes netting investors as much as 7-10% for single residences. Selling a student accommodation can also be more challenging that a property open to a broader base of tenants.

Even in a city with multiple major universities like Melbourne, there is a limited market for student accommodation. “Whenever you want to get out, it’s hard to sell,” says Yardney.

There’s especially a risk if the student population dwindles and demand drops. Few other populations other than students will live in student-oriented housing. “You don’t get the leverage that you would with a normal investment,” says Yardney. “You’ve got a very limited demographic of tenants.”

While many rentals are often suitable for about 80% of the population, student accommodation only fits to about 5%, says Gray. “There’s potentially more risk, but if you know the area and the market well, there’s potentially more reward as well,” he says.

Insurance, marketing and cleaning

A common impression of investors is there are often much greater costs involved with student accommodation, such as insurance and marketing. But Haber says that is no longer the case.

“You will not require five insurance premiums,” he says of the misconception. His Student Accommodation Association Industry has now tailored an insurance solution for student accommodation, which Haber says is low in risk compared to similar single residency arrangements. It provides insurance akin to a typical landlords insurance policy.

Yardney says marketing costs are disproportionately high compared to normal single residence accommodations. Plus, banks tend not to lend as much for student housing purchases, she adds.

But Haber disagrees. Major banks are also now beginning to realize the strength of this area of housing and seeking to increase market share, he says. As for marketing, it’s not necessarily any higher than any other rental property.

“Specialist operators and property managers provide a guaranteed marketing effort, given strong branding and recognition by the universities as a preferred supplier,” Haber says. “Often it is the case that the students themselves are a good source of referral marketing on the ground, particularly if they enjoy where they are staying.”

Cleaning costs are another misconception, says Haber. While these costs certainly exist, investors need to remember the net returns they will receive in rent. In many cases, the net profit is 30% to 40%, says Haber. “The incremental costs associated with student accommodation are more than compensated for by the significant increase in gross rental returns, which in many cases is more than double that of a single tenancy arrangement.”

Generally, the students are in charge of their own rooms, and the landlord must pay for cleaning the communal areas. “There are more expenses, but there’s also more income to cover those extra expenses,” Koulizos says.

Making it work

Just as with any property, location is a key factor with student housing. It’s important to remember not all properties are suitable for student housing, says Koulizos. “It must be near the university, or near public transportation to reach the university,” he says. Just like workers often like to be close to their office, students like to be nearby their classes.

Some cities around Australia are especially known for students living there, such as Ultimo in Sydney, Carlton in Melbourne and Kelvin Grove in Brisbane, to name a few. “If your property was already student housing before, then that’s promising that you’ll be able to find student tenants,” says Koulizos. “If you’re there (nearby a university), then certainly consider it.”

Gray says he owns student accommodations and has directed his rental agreement through the nearby university. That way payments are guaranteed, and it’s not as difficult to find tenants. Hiring a management agency such as The Pad is another good option to make sure everything is covered. For those looking to make the agreements on their own, pinup boards, university intranet, and other paid advertising are options to secure tenants as well. Homesick students, roommate conflicts and other problems can sometimes mean there is a quick turnover.

While Gray personally recommends a safer investment strategy than just student housing, he does see it as a good option for diversification. “If you’ve got a property portfolio, having 10% or 20% of student accommodation in that mix could be a way of diversifying,” he says. “Generally, it’s something positive, but just be aware of the risks.”

Gray recommends investors that are interested try having a chat with the nearby university’s housing department, as well as speaking to professional property managers that handle student accommodation. “You’re normal real estate agent might not be the best person, as you want someone with a knowledge about student accommodations,” he says. “(The specialized property managers) will be aware of what can go wrong and what the right approach is.”

Haber, as a specialist himself, concurs. “In many cases, a typical real estate agency or rental agency is not adequately equipped to manage student accommodation and does so as if the property were a single tenancy agreement,” he says.

While keen to promote university neighbourhoods for investment, Yardney says the better option is to get a more diverse property that is not only geared towards students. “I actually think those make very good investments,” she says.

“Aside from students, you get teachers and other staff. I have no issue with that, because I’d rather have something with a broader appeal.”

This article has been provided courtesy of our friends at Your Investment Property, and is ©Your Investment Property magazine and republished with permission.

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