House prices – one of the UK’s favourite topics of everyday conversation.
If you’re waiting to get on the property ladder you’ll think they’re way too high; if you’re trying to sell they’re probably way too low and if you’re a residential property investor you’ll be watching anxiously for any signs of boom or bust.
It can be a volatile market – and a highly personal, selective one.
The problem with offloading a property is that your target market is much, much smaller than you might think. If it’s a 2-bed, you’ve lost everybody who wants 3 or 4. If it’s not near a good school, you’ve lost a lot of younger families. If it doesn’t have good road and rail links, you’ve lost a lot of working professionals. Some people will insist on off-street parking, others will reject a property with a north-facing garden – people are quite rightly very fussy about the place they’re going to call home.
This has a significant effect on individual property prices; in fact, research by the online property resource Zoopla earlier this year revealed that 31.6% of residential transactions go through below the asking price, with an average discount of £24,989.
Compromise not compulsory
Property investors don’t need to be subject to such whims and personal preferences, however.
There is a lucrative alternative in commercial property, which is assessed and valued purely and simply on its ability to deliver rental yields. Nobody really cares where it is or what it looks like as long as it makes money.
Another immediate advantage of the commercial sector is that the levels of Stamp Duty are very different from residential; in fact, below £150,000 there is none to pay at all. And when it comes to resale, there’ll be no Capital Gains Tax either.
There are plenty of commercial investment opportunities open to the private individual – retail units, office space, warehousing and leisure outlets, for example – but the 2 jewels in the UK property crown are purpose built student accommodation (PBSA) and serviced apartments.
Desperate shortage of student housing
And where there’s a shortage there’s always demand. This is one reason why PBSA has been the UK’s highest yielding property asset every year since 2011 (Knight Frank).
Student numbers have been rising steadily over the decades, and the removal of a cap on admissions has contributed to record intakes for the last four years.
An unfortunate side-effect has been the amount of residential property they take up; with traditional halls of residence woefully ill-equipped to deal with such an influx, students have had to make alternative accommodation arrangements. This has been a major factor in the growing national housing crisis, with RICS estimating 1.8 million new homes will be needed by 2025.
The government is eager to free up as much residential accommodation as possible, and is therefore making buy-to-let ownership increasingly complex and unprofitable. It is actively encouraging private sector involvement in student developments which are rewarding both financially and socially.
The best examples of PBSA start at around £45,950 and will typically earn their owners 8-10% NET every year for a contracted 10 years.
Being fully managed onsite, investors have no responsibility whatsoever for letting, collecting rent, maintenance or repairs; it should be a completely hands-off investment.
It should also be possible to transfer the fixed income period to a new buyer; this will allow the vendor to make capital growth of as much as 40% while the buyer will receive very healthy yields for the rest of the term.
The rise and rise of serviced apartments
The fastest-growing accommodation form in world hospitality, serviced apartments are hugely popular for their ‘make yourself at home’ atmosphere which is so different from traditional hotel rooms.
Originally designed for the business traveler, the Airbnb generation is today claiming the serviced apartment as a preferred vacation accommodation.
With visitor numbers to the UK increasing steadily over the last decade, the sterling exchange rate is certain to attract even more in the years to come. Similarly, more and more of us living here will choose to take a staycation break at home.
Like PBSA, a good serviced apartment will be fully managed onsite. Although the starting price is a little higher at £88,000, it should deliver 10-12% NET for the next 10 years; resale flexibility is also important.
Safe as houses
Of course, some PBSA and serviced apartment investments are better than others. James Harrington, Business Development Manager at specialists Emerging Property has a few tips: “Remember that you’re not going to live in these properties; all that matters is the income they yield. Make sure your developer has done all the homework necessary to choose an ideal location, and insist on seeing it.”
Shorter fixed income periods are often a sign of an inflated initial purchase price, and should ring alarm bells. Harrington warns, “A student property or serviced apartment is subject to quite a lot of wear and tear; both will need refurnishing and refurbishing after about 5 years. If you have a 5-year contract, who’s going to be liable for that cost? With a 10-year fixed income period, your developer will have to pick up that significant tab.”
As with any property investment, you should speak to an expert who knows the market and the individual developments inside out before you commit yourself; there’s no time like the present.