Invest in a student room and receive a guaranteed income of 7 per cent for five years
What's the attraction?
Buying a student room may seem an unusual form of property investment, but investors are being tempted in with promises of a guaranteed income of 7 per cent for five years.
Such a return has additional appeal as it is achieved with minimal effort, as once investors hand over their money they have little to no involvement in the actual day-to-day running of the property.
Companies like Select Property Group, whose development we visited, not only develop and sell the properties, they also manage them under its Vita Student brand.
It means no tenant calling about a faulty boiler or a leaking bathroom, and no additional costs for replacement cookers or sink taps.
It's an approach to property investment that appeals to a growing number of investors, with former M&S boss Stuart Rose having given his backing by investing in the company.
Select Property Group has sold all of the 202 rooms at its student block in Southampton, and now has new student sites opening in several other cities such as York, Newcastle, Edinburgh and Glasgow.
Prices at these sites range from £59, 450 for a room to £453, 364 for a so-called cluster of five rooms.
Select Property Group has sold all of the 202 rooms at its student block in Southampton
Students pay between £157 and £249 a week for a room in at Vita Student in Southampton
Facilities in Southampton include a games area, gym and laundry facilities
The studios are fully kitted out for students, with double beds and 40 inch televisions. They have their own kitchens and ensuite bathrooms.
Students pay between £157 and £249 a week for a room in the Southampton block. Select Property Group then takes its cut to cover costs, with investors next in line to receive returns paid out at the end of each university term.
Trevor Moore, chief executive at Select Property Group, says: 'A lot of people will have bought a traditional buy-to-let and suffered financially when the boiler breaks down or they have void periods. But with this type of student property investment, there is no such lumpiness in their returns.'
Watch out for the pitfalls
However, there are some potentially big pitfalls that go with this type of investment, with perhaps the biggest being the guaranteed return of 7 per cent.
A guarantee is only as good as the person or organisation giving it, so investors need to carefully weigh up whether they think Select Property Group is robust enough to stand behind the guarantee.
There's also the risk to the chunk of money originally invested, with there being no such guarantee offered for its safe return. The value of the property will fluctuate with the market and crucially the willingness of people to put their money into such an unusual investment.
Owners can put the room back on the market for sale at any time they wish - and in the case of Southampton, some investors are already doing so. The issue is that they need to be able to find someone to buy it off them and the market for second-hand student rooms is a lot more niche than the overall market for flats.
One of the reasons for this is that the majority of buyers of student rooms are cash buyers, although it is possible to get a mortgage for this type of investment in bricks and mortar. Prospective investors are likely to find that the pool of lenders willing to offer loans to buy such a property is much smaller than the wider buy-to-let market, however. There is also the risk that new loans may not be available when comes to the time to refinance.
Moore explains most investors buy the rooms as they are looking for income rather than capital growth.
'There will always be winners and losers. The real test will be if this is the best student accommodation in 10 years' time.'
There is also no escaping the new tax measures introduced by the Chancellor, with the tax relief reductions and stamp duty rate increases both applying to such an investment in student accommodation.
If you're looking for a good rental yield with minimal involvement, then this may be an option worth looking at. However, you may decide that the risks are simply not worth taking.
Jeremy Leaf, former RICS chairman and north London estate agent, points out: 'Investors need to consider capital growth and income. If that income is guaranteed, with no expenses to be deducted from it, then it is pretty good. But what happens after the five years when the guarantee no longer applies?
'The value of the development may have fallen so it is worth less than it was at the start if other developments have sprung up over five years. Investors need to go in with their eyes open. Stuart Rose can probably afford to make a loss - can you?'