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Investing on campus
Your child is about to fly the nest and head for university overseas. Now might be a good time to buy a house close to campus and rent it out to him and his fellow students, writes Jane Drew
A first-class education is one of the most valuable gifts a parent can give a child, and many Hong Kong-based parents opt to send their children to university overseas. Costs are of course high, for instance if you send a child to a British university today, you are looking at paying between £49,601 (HK$629,583) and £55,900 for each of the three years. But what if you choose to turn this into an investment opportunity by buying a house to let to your young scholar and his friends?
“It is foremost an investment decision,” says Ian Balfour of Coombe Residential in London. “Thus one has to look at the current cost of the property against rent received (the yield). If you are able to absorb the, presumably higher, cost of the mortgage against your child and his friends paying rent and/or you have a large sum of money that you wish to invest, then why not? It is every parent’s wish to make their children’s lives as comfortable as possible.”
It’s also a great time to pick up distressed property in Western countries that have been battered by the economic recession. Having reached rock bottom, the U.S. and U.K. markets are beginning to show signs of recovery, so if you buy a house now, its asking price will likely increase dramatically over the next three to four years.
“We believe now is a good time to buy U.K. property,” says Tim Murphy the managing director of Hong Kong-based property investment company IP Global Ltd. “There is a lack of supply of quality built property, and you’re getting a 20 percent to 35 percent discount now compared to a year ago.”
Potential investors should note that it’s also relatively cheap to borrow in Hong Kong, Britain and the United States since interest rates are low.
Murphy warns that in a down market, it is particularly important that you identify the right areas in which to buy. Investors in both the U.S. and U.K. feel opportunities are best in the largest cities, as suburban or rural markets may take years to recover fully. Balfour agrees, saying investment viability would depend on “which city or town the university is in and the market history”.
The U.K.’s plunging buy-to-let market is showing the first signs of stabilising: figures from the first quarter reveal only a slight decline in new lending. Reports show, however, that even during the worst of the recession, student accommodation in the U.K. has been providing good returns. According to Knight Frank, an increase in the number of students means housing them is now more profitable for landlords than residential lets. Undergraduate developments have seen an average annual return of 12.2 percent in the past three years, compared with 9.7 percent for buy-to-let residential property.
University towns are always going to have a ready list of tenants, and demand for student accommodation in the U.K. has sky rocketed in recent years. The government’s aim to put half of all school leavers through higher education by 2010 has encouraged universities to expand. What’s more, the pound’s collapse in value has made the U.K. a more attractive study centre for overseas students. In London alone, there are 260,000 full-time students – more than any other city in Europe. Purpose-built accommodation is going up to supply the demand but for the time being it is a landlord’s market and rents are on the rise.
According to Unite, a London-based developer specialising in building student halls, rents will go up by as much as 25 percent in the coming academic year (2009/10). You can rent out an en-suite room for between £240 and £348 a week, and a studio for between £170 and £196 a week.
It’s worth noting that increasing numbers of students, particularly those from overseas, opt for this type of purpose-built accommodation, which offers higher living standards and better security than traditional student flats or houses. Investors will also want to investigate the government’s plans to crack down on ‘studentification’ by preventing homes being rented to more than six unrelated people at a time.
According to a Communities and Local Government spokeswoman, “Students bring benefits to the places they live in, but too many residing in one area can impact negatively on a community, running down neighbourhoods and leaving places as ghost towns during the summer. This is a real problem in many communities across England, which is why Communities Secretary John Denham is committed to finding a long-term solution to current rental practices.”
Rules requiring houses with multiple tenants to be licensed by local councils have already been brought in. This was meant to affect houses of three or more storeys with five or more unrelated tenants, but councils have been allowed to apply it to smaller homes, as well as charge varying fees.
While U.K. landlords, student unions and the government battle this out, it’s advisable to invest in one of the new buy-to-let halls of residences being built by developers in collaboration with universities – if you can beat the hard-nosed investors to it. While a management company takes care of leasing in coordination with the university accommodation office, investors who are parents can request to have their properties tenanted out to their children. Halls typically contain various types of unit, ranging from large apartments with eight bedrooms to small studio flats.
At Victoria Park student hall of residence in Manchester, five-bedroom units, all with en-suite bedrooms, are on the market for around £250,000. Rents average at £49 a week, providing a gross yield of 7 percent before service charges of 15 percent. At the Junxion, in Lincoln, prices range from £160,000 to £275,000.
adviceBoth halls feature an internet café, a laundry and games room, plus 24-hour security.
Clearly students are more demanding these days. You won’t get far by buying a fixer-upper on the outskirts of town, and spending a few thousand dollars on the paintwork. Wireless broadband is generally viewed as an essential, as is a plasma TV and an en-suite bedroom with shower.
To attract decent rents, a property will also need to be close to the university and to the city centre for shopping and night life. Balfour advises, too, that any investment property needs to be “near good transport links”.
Buying property near campus can allow your child to live cheaply or even free, depending on how generous you are, and filling the other rooms with fellow students will help pay the mortgage. “But students will not pay as highly as corporate tenants or young professionals,” warns Balfour, “thus your yield may be lower.” One solution: when your children have graduated, give the property a facelift and start renting it out to corporate types.
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