As the student housing crisis intensifies and interest rates continue climbing, the current landscape for student property investment is confusing for prospective landlords.
On one hand, economic indicators suggest it could be an expensive time for venturing into the property market. On the other, there’s unprecedented demand for rented student accommodation.
In this article, we’ll explore the pros and cons of investing in student housing in 2023, helping landlords decide whether now is a good time for them to invest.
Why Invest in Student Property?
Managing student properties is often considered more labour-intensive but substantially more rewarding when compared to traditional buy-to-let investments.
Before we look at the specific conditions shaping the student housing investment market in 2023, let’s learn more about the general benefits and challenges of investing in student property.
Landlords are often attracted to investing in the student housing market because of the superior rental yields that can be achieved with a student let, especially when dealing with a House in Multiple Occupation (HMO) where rooms are let out individually. Student properties are also often highly affordable to buy, as they’re located in cheaper student suburbs and inner-city locations. There is always a high demand for student accommodation too, which typically results in low void rates, providing landlords with a more stable income. Additionally, student tenants are generally reliable when it comes to paying rent.
On the flip side, managing student property does, of course, also come with its share of challenges. The initial set-up can be more complex and expensive than a traditional buy-to-let as you may require a special licence, and the property must be fully furnished for your student tenants. Student accommodation also tends to suffer a higher level of wear and tear and requires more frequent maintenance. Managing multiple separate tenants also increases the administrative burden. During the summer months, student landlords may also experience a drop in occupancy as students go back home, leading to either no rent or reduced rent during this period.
It’s good to understand these standard pros and cons of investing in the student property market before we look at the unique circumstances that make 2023 a good or bad year to invest.
To decide whether a student buy-to-let could be a good investment for you, consider whether the unique aspects of managing a student property align with your existing commitments, lifestyle, and financial goals.
Factors to Consider Before Investing in a Student HMO or PBSA in 2023
Determining the right time to invest is crucial in any investment venture, and the student property market is no exception. Understanding and considering various factors, including the economic landscape, market demand, and your personal circumstances is important.
Here are some key considerations when deciding whether to invest in student property in 2023.
- Personal circumstances – Before investing, evaluating your financial situation and time commitments is important. Do you have the necessary capital to initiate and sustain the investment? Are you prepared for the time it takes to manage a student property? Or, if not, can you afford to pay for a property management service? Your circumstances play a pivotal role in determining whether this investment is right for you at this moment.
- Economic landscape – The economic climate can have a huge impact on the profitability of your investment. High interest rates, for example, could reduce your returns. Therefore, it’s very important to understand the current economic landscape, including inflation rates and property market trends, to gauge whether 2023 is a good time to invest.
- Supply and demand – The success of any property investment is largely dictated by supply and demand in the chosen location. Investigate the local market conditions where you plan to invest to get a clearer picture of the potential profitability and longevity of investing in the area.
Reasons to Invest in Student Accommodation in 2023
If you’ve read this far and investing in a student HMO or purpose-built student accommodation (PBSA) is still appealing, then it’s time to consider whether 2023 is the right year.
We’ve rounded up some reasons for and against investing in student property in 2023 to help you make a more informed choice.
Here are some key market conditions favouring investment in 2023:
Demand is at an All-time High Due to the Student Housing Crisis
The student housing crisis has been a recurring subject in news headlines as we enter the new academic year. A culmination of factors has led to unprecedented demand for affordable student housing. According to an inews article, there is a staggering shortfall of 283,100 student beds for 2023, a figure that they predict will rise to 620,000 by 2026. Cities that have been hardest hit include Manchester, Bristol, and Glasgow.
Some factors that have led to this enormous shortfall include:
- Growing 18-year-old population – An article in the Economist states that the number of 18-year-olds in Britain fell during the 2010s but has now begun to rise sharply. In 2020, there were 715,000 18-year-olds in Britain, but by 2030, there are expected to be 893,000.
- Increase in international students – The number of non-EU international students coming to the UK to study has been growing steadily for the last six years. According to stats on the ICEF website, the number of international students in the UK grew by 12.4% in 2021/22 over the previous year. A growth driven entirely by non-EU students from countries like China, Nigeria, and India.
- Supply growth has slowed – According to an article published by Hepi, the UK’s only independent think tank devoted to higher education, bed space growth in PBSA has slowed down significantly over the last four years. In 2020, 29,048 new bed spaces in purpose-built student accommodation were built, compared to just 13,543 this year.
- UCAS applications rising – UCAS predicts there could be up to a million higher education applicants in a year by 2030. If the demand for university places continues to grow, so too will the demand for affordable student digs.
Declining House Prices
An article on The Times website found that UK house prices dropped by around 5% in the year to August. This is the steepest annual fall since 2009. If house prices continue to drop, now could be a good time to pick up a student property cheaply. Landlords who can pick up a property cheaply in a university city with high demand for student housing could achieve an excellent return on their investment.
Strong Rental Growth
The rent price has been growing throughout the rental marketplace, and student accommodation is no different. The imbalance between supply and demand has meant that rent in the student housing sector has grown by 5% on average in 2022/23. According to Knight Frank, Global Real Estate Consultancy, this is expected to grow between 6% and 7% for 2023/24.
Challenges of Investing in Student Property in 2023
While 2023 offers compelling reasons to invest in student accommodation, weighing these against the potential challenges is crucial.
Low Supply of PBSA and Declining Number of HMOs
Landlords may find it more challenging to find a suitable HMO or PBSA to invest in due to the noticeable decline in supply. The short supply of properties limits options and could potentially complicate or harm the profitability of your student property investment.
The Department for Levelling Up, Housing, and Communities estimates that the total number of HMO licences across England has decreased by 4% (21,000 licences) between 2019/20 and 2021/22. It is thought that several factors, including higher mortgage rates, taxation and legislation changes, and stricter HMO regulations could cause this decline.
Furthermore, in 2023/24, fewer than 15,000 PBSA beds will be added to the supply, a fall of 28% on the previous year’s delivery and notably lower than the five-year average pre-pandemic of nearly 24,000. According to Knight Frank, this delivery drop continues a longer-term trend of fewer new schemes being bought to the market. This decrease could be caused by inflationary pressures that have driven construction and operating costs up, making it harder to fund student housing schemes.
High-interest Rates on Mortgages
The Bank of England’s base rate currently stands at 5.25% after 14 back-to-back rises. The average new two-year fixed rate mortgage stands at 6.58%, while the average five-year fixed rate mortgage stands at 6.07%. These steep rates will impact your potential returns, so be sure to factor them into your calculations when estimating the feasibility and profitability of investing in a student HMO or PBSA.
What is the Student Property Market Outlook Like?
In 2023, the student property market presents both opportunities and challenges in equal measure. On the one hand, the sector is grappling with a supply shortage caused by a decline in available HMOs and a slowdown in the construction of purpose-built student accommodation. However, despite these challenges, investor confidence remains robust. According to property experts Savills, investors spent £7.8 billion in the PBSA sector in 2022, up 89% on 2021. Investor optimism is no doubt being buoyed by the fact that the demand for student accommodation is at an all-time-high and only expected to keep on growing over the coming years.
HMOs are a significant player in the affordable student housing market; however, the market is currently facing various challenges. Regulatory changes, increased mortgage costs, and the potential repeal of fixed-term tenancies as part of the Rental Reform Bill are discouraging some landlords from entering or remaining in the HMO market. However, student HMOs are still a profitable investment for landlords who are able and willing to take on the time and financial commitment of managing one, particularly in the areas where demand is at its highest.
Whilst the economic landscape is currently challenging and student lets are in short supply, the high demand and growing market for rented student accommodation make 2023 a potentially lucrative time for carefully investing in student property.