The main problem of the Russian speaking investors — finding the optimal (from the point of view of risk and return) of the object for investment. Nonresidential real estate commercial real estate usually not available to ordinary investors because of its high cost, so most of customers buy housing for rental. Apartments for sale and renting for long term rent has obvious advantages — first and foremost is the ease to manage, but there are also disadvantages, such as relatively low yield (about 3 %) and problems with eviction of tenants if necessary.
Minimum, from the point of view of losses, the way for investment — student accommodation, a kind of «Golden mean» of the real estate market. A good option from the point of view of the balance of risk/return. The truth is, only 5 % of Russian-speaking investors considering investments in this type of property, while abroad it has long been considered one of the most profitable and promising.
What’s the benefit
From 2012, foreign investors invested annually in the student apartments for at least $6 billion — and that’s just counting the big deals (more than $7.5 million). What are the advantages of such a tool?
First, the number of students is growing in the world. According to the OECD (Organization for economic cooperation and development), the number of people studying abroad has increased from 2 million in 2000 to 4.5 million in 2012, and by 2025 their number will reach 8 million people. In addition, the growth of the middle class and the increase in the number of wealthy people in the emerging economies (particularly from China) also means increasing demand for student rental accommodation.
High demand means that the risks of the investment in the student apartments is lower than when investing in real estate. So, for office tenants is strongly influenced by the economic situation, and students need housing always, even in times of crisis.
Second, student apartments yield higherthan the yield of conventional apartments, surrendering in the long term. In good areas of European cities student property brings in an average of 4-6% per annum, while conventional housing is 2-3 %. The yield may be above or below 4-6%, depending on how large the University is in the neighborhood, how far is it from the University located and how they are high quality and modern. Accordingly, the higher the quality and better the place, the lower risks and higher profitability.
Thirdly, investment in student apartments have low threshold to enter the market. To buy apartments at a price of €90 000 – 100 000 but for investments in the whole building will need a €15-30 million. for Example, investors can purchase the new student apartments with an area of 17-23 m2 £70 000 – 100 000 in Liverpool. Return (without deduction of expenses) will be 7 %, or £4 900 per year with the purchase of the Studio for £70 000. The purchases budget can be reduced by half if you use a mortgage loan. Those with large budgets will be interested in buying the whole hostel. So, for €14.7 million to buy the student complex on a hundred apartments in Nuremberg. The yield of 4.9 %, or over €720 000 per year.
Another plus — passive control. For business owners in Russia, overseas property — savings tool, not a primary source of income, and they have no time to manage. When investing in student apartment management is carried out by the management company, which is usually the developer who built the dormitory, the investor does not need to think about solving different problems (finding tenants, repairs, etc.). The cost of the services of a management company — about 10% of the rental income.
Participation in co-investment construction of apartment complexes in Europe for private investors implies a passive investment (management handled by the management company), while buyers receive income not only from rents, but from redevelopment.
However, as with investments in any other type of property, the investment in student accommodation has its risks. For example, student apartments difficult (or rather impossible) to convert, because they are located in specialized complexes near universities, and they can live only students. Investors themselves are unable to use the apartment for their stay, and dwell in them someone who is not a student. And if the apartment is not located on the most popular market and the demand for this University fell, the owner will be difficult to sell.
Liquidity student apartments is lower than the liquidity of conventional apartments, but higher than non-residential facilities.
It is important to understand that student accommodation in hostels is not the same as ordinary residential flats in multi-apartment buildings. Developers often use the inexperience of investors and advertise Studio apartments in apartment buildings in areas near universities as student apartments. The difference is that the documents should be specified that the object can only be used as a student residence and live in the building can only University students.
As mentioned above, the yield of student apartments is 4-6 %. If the seller promises high yield (9-10% or higher), it is likely that investments will be associated with additional risks — unattractive location and therefore low demand, poor management or the deterioration of buildings. To protect yourself from latest risk — low quality of the object and its obsolescence — it is recommended to buy new objects. Best place to buy apartments in the primary market, as with buying a second home quickly there are repair costs, which reduced profitability.
Where to buy
To buy profitable student accommodation in UK, Germany and France. These markets are reliable and are of high demand by local and foreign students (the share of the latter is 10-20% of the total enrolment). Opportunities for private investors in the markets of Austria, Spain and Switzerland is limited, because there are objects still in the design phase bought by corporate investors and funds. As for the US — the largest market student apartments, the proposal is excessive, the potential increase in rental rates is limited, and even local investors flock to European markets in search of more lucrative offers.
The reason you need to pay attention to the presence of «magnet» — located near popular University, as well as the lack of excess supply in the local rental market, where student apartments can compete with a large number of private apartments, and yield a negative impact of low rental rates.
Also important is the demographic situation — how is growing and will grow the number of students in the city. If the number of students does not change or decreases, but the construction of new dorms and facilities, the occupancy rate is low, the apartment will be empty, and investment will not bring profit. For example, in Germany the number of students grows almost everywhere, but there are cities, such as Jena and Greifswald, where the number of pupils over five years decreased by 10-11 %.
In the UK for investment in student apartments promising major University centers with insufficient supply of housing, such as Bristol, London, Oxford and Edinburgh, and Manchester. In Germany the potential of cities in Bavaria (würzburg, Nuremberg, Passau), as well as Heidelberg and Frankfurt am main. In France a good investment opportunities there are in the cities of AIX-EN-Provence, Lille, Montpellier, Pessac, Marseille, Strasbourg.
Lifehack for investors — among the first to know where and when will open the new faculty or the University, and to buy a number of apartments.
For example, at the end of 2017 will begin construction of a campus in Cardiff, and thanks to the project, the local University will attract 2,000 students from around the world. And by 2019 in the Northern suburbs of Paris opens Europe’s largest campus faculties of social Sciences in which to work and study teachers and students from several universities.
With the spread of Internet technology growing in popularity is to purchase distant learning, but traditional forms of education will remain the focus of students in the coming decades. And, therefore, student apartments near the University will still be popular.
Georgy Kachmazov, managing partner Tranio