Does your property investment seem too good to be true?
PUBLISHED: 10:40 11 October 2019 | UPDATED: 10:40 11 October 2019
Investors should beware promises of unusually high rental returns, says financial expert Peter Sharkey.
Reports this week of delays in the completion of student housing in various cities, including Bristol, Portsmouth and Swansea, have drawn understandable criticism and acted as a warning for wannabe property investors.
According to the BBC, a total of 22 privately-funded student housing projects were unfinished in time for the new academic year. That sounds like an incredibly large number and suggests that every instance of late completion has been lumped together for the sake of a headline.
There's a significant difference between minor snagging which may have delayed occupancy by a few days and major construction work which could take several months to complete. In both instances, however, developers are having to (rightly) pick up the tab for alternative accommodation, especially as many signed up students as tenants for properties that remain unfinished.
Nevertheless, the experience is not great for first year students who account for the majority of tenants in freshly-built accommodation. Most are in a new town; their surrounds are unfamiliar and they're much more focused on getting their time in further education off to a good start rather than living out of a suitcase for an indeterminate period of time. I have a great deal of sympathy for youngsters who find themselves in such an invidious position.
But the episode also raises questions regarding the surge in the construction of student accommodation, much of which is sold 'off-plan' to investors with the promise of attractive returns from day one.
Spend five minutes browsing online and you'll come across hundreds of agents selling student accommodation in various locations, a significant proportion of which is offered with 'guaranteed rent' for three, four, or five years which, in several instances, equates to net returns exceeding 8%.
Most, however, are not two- or three-bedroomed flats, but self-contained studios which vary in size from 17 to 33 square metres.
One standard-looking development currently offers a three year, 6.5% guaranteed rent return on an 18 m2 studio. That sounds attractive until you consider the asking price (£147,000) and realise it's well over £8,000 per square metre.
Indeed, the arithmetic might suggest that the 'guaranteed rent' is already built in to the asking price and that investors are simply getting a percentage of their own money back over the three year term.
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What, you might ask, happens after three years?
Well, consider this. I vividly recall taking a prolonged look at student accommodation investment opportunities in two cities, Leeds and Manchester, around 10-12 years ago when a mini construction boom appeared to be in full swing. In fact, so much student property was built that a glut soon appeared and many completed units remained empty because rents were cheaper in other parts of each city where students had traditionally lived.
Yet a sizeable proportion of property had been sold 'off plan' with the promise of guaranteed returns; the subsequent accommodation glut meant some property remained empty for years, beyond the guaranteed period, and only attracted tenants after rent levels - and property asking prices - both tumbled.
One of the very best investment decisions I ever took was to buy my first investment property in 1986. The timing was a complete fluke and I suppose that in return for what might be called a decent investment credit, a number of debits have been applied over the intervening years.
I've listened to plenty of property-related advice since 1986, thankfully sticking to the principle (some people would say the only) rule: location, location, location, adding a couple of others that have stood me in good stead.
First, always consider your exit route, ie will your investment property sell to buyers other than investors if you need cash in a hurry? There's little downside in being able to pitch a property to the widest possible audience.
Second, if something looks too good to be true….Well, you know the rest.
These rules appear appropriate if you're considering an investment in the burgeoning student property market. Be wary when a developer is quoting higher-than-average rental returns and take account of your ongoing management costs, the impact of Stamp Duty and the almost complete withdrawal of what were once attractive tax breaks. Once you've considered these factors, your focus may switch elsewhere.
TAM Asset Management Ltd offer savers the opportunity to invest in a variety of Investment ISA portfolios and through other investment accounts.
For further details, please visit the MoneyMapp website.
For more financial advice, check out Peter Sharkey's column, The Week In Numbers.