The student housing market has long been viewed as a lucrative sector for buy-to-let (BTL) investors. But rising property prices, higher taxation and increased regulation are reshaping the market — and the type of investor it now attracts.
There are concerns that upcoming rental reforms, coupled with a shift in student demographics, could bring further structural changes, potentially negatively affecting both landlords and tenants.
On the face of it, it’s not hard to see why this has been a profitable market for investors in recent years. Over the past three decades, universities have expanded significantly, driving demand for rental accommodation in many UK towns and cities.
The proposed changes may lead landlords to choose standard tenancies for more rental security
Previously, this has been a way for wealthier parents to enter the BTL market, with some opting to buy property to subsidise accommodation costs for their children, then keeping it as an ongoing investment.
But this dynamic is starting to shift, as SPF Private Clients director Wendy Docherty explains.
“The increased stamp duty on second homes and higher taxes are dissuading many parents, as these reduce savings and make the whole scheme less attractive.”
This is borne out by closer analysis of the sector.
Paragon Bank research, conducted with Pegasus International, shows that the student BTL market is increasingly dominated by professional landlords.
Paragon managing director for mortgages Louisa Sedgwick says: “Compared to the broader BTL market, a higher proportion of landlords in this sector let property as their primary occupation. They have managed lettings businesses for longer and have larger portfolios with higher overall values.”
You could have a house rented under an HMO licence, and we can finance this using standard HMO BTL products from more specialist lenders
While the higher entry costs may deter novice landlords, there are still attractive yields for those who find the right opportunities.
Paragon Bank reports that the average yield for BTL landlords recently hit a 10-year high of 6.3%, with student BTL properties generating even stronger returns at 7%.
Sedgwick says: “This has helped contribute to nine out of 10 landlords in this sector making a profit.”
Profitability
The key to profitability, as in any BTL venture, is finding the right property in the right location.
Paragon’s research shows that cities with Russell Group universities — a collection of top-tier, research-focused institutions — tend to offer some of the highest yields.
For example, student properties in Liverpool generated yields of 8.93% last year, followed by Edinburgh (8.34%) and York (8.12%).
The proposed rent reforms are unlikely, ultimately, to benefit students
The top performer, though, was Stoke-on-Trent, which is not in this elite Russell Group. Student properties in the city generated average yields of 9.34%, although this may largely reflect the lower price of student properties here, at an average of £146,944 per property, compared to £295,722 in Liverpool and £398,320 in Edinburgh.
Sedgwick says successful student landlords aren’t just looking to buy in specific cities; they will have in-depth local knowledge of these areas, targeting specific postcodes and even individual streets known to be popular with students.
There is a mix of student housing options available to investors. At one end, there are large, purpose-built student accommodation blocks (PBSAs), typically owned by universities or third-party providers such as Unite. Then there are larger houses of multiple occupation (HMOs), often converted Victorian terraces housing up to 10 students, as well as smaller flats.
The changes could drive some landlords out of the market at a time when there are already well-reported shortages of student accommodation
Docherty points out that HMOs, often used by second- and third-year students, remain a large part of this market. But typically these are owned by portfolio landlords.
“Generally, you need to be an experienced landlord to manage HMOs. The tightening of regulations and strict rules mean this is not for the inexperienced,” she says.
London & Country director of communications David Hollingworth points out that not all BTL lenders are keen on student tenancies, although both mainstream and specialist lenders do offer finance. The more mainstream lenders often limit the number of tenants in student properties, he says.
Compared to the broader BTL market, a higher proportion of landlords in this sector let property as their primary occupation
For smaller ‘Mum and Dad’ investors, this may mean they are restricted to two- and three-bedroom flats — still used by some students but perhaps not as profitable as larger HMOs.
Docherty adds: “You could have a house rented under an HMO licence, and we can finance this using standard HMO BTL products from more specialist lenders. If it’s a PBSA, there are products available, though typically not from a standard BTL lender.”
Headwinds
Although yields remain buoyant, there are a number of looming headwinds threatening the sector.
Brexit, Covid and tighter visa restrictions have already reduced the number of overseas students coming to the UK to study. This has impacted university finances because these students pay far higher fees.
Successful student landlords aren’t just looking to buy in specific cities; they will have in-depth local knowledge of these areas
Reports suggest that some institutions are facing financial difficulties, fuelling concern that more study courses could be shut down, and that, in extreme cases, some institutions may merge — leading to a more permanent contraction in student numbers.
Of more immediate concern to many landlords, however, is the proposed Renters’ Rights Bill, published in September. This is likely to have widespread ramifications across the BTL sector but could particularly affect landlords in the student market.
According to Lawson Financial mortgage adviser and director Michelle Lawson, most student tenancy agreements are fixed-term assured shorthold tenancies, typically running over 48 or 50 weeks to align with the academic year. However, the proposed bill seeks to abolish these, replacing them with rolling tenancies.
Nine out of 10 landlords in this sector are making a profit
This would allow students potentially to give just two months’ notice and vacate the property at any time.
If students chose to serve notice in April, they could leave in June. This could leave landlords with empty properties over the summer months, with limited prospects of finding new tenants until the start of the academic year at the end of September.
“These long void periods would have a major impact on landlords,” says Lawson. “There could be other negative consequences too.
“It could invalidate insurance policies, as many allow for vacancies of only up to 30 days. Additionally, landlords may face standing charges on utilities, and would need to arrange property inspections during vacancies to ensure the property remained safe.”
Another concern is the bill’s proposal to abolish Section 21, which allows landlords to evict tenants at the end of a fixed-term tenancy without having to provide a reason.
Generally, you need to be an experienced landlord to manage HMOs
If this is scrapped, landlords may struggle to regain possession of properties for the two- or four-week window at the end of the summer, during which they carry out maintenance and repair work to ensure the property is ready to be let again for the new academic year.
Various organisations, including the National Residential Landlords Association and several universities, have raised concerns about the bill’s potential impact on the student housing market.
It remains to be seen whether these concerns will be heeded, and changes made, as the bill makes its way through parliament.
Lawson suggests these rent reforms are unlikely, ultimately, to benefit students either — with landlords likely to increase upfront rent charges to cover potential void periods. For students who stay on into the summer, for graduation ceremonies, exam retakes or work, this is likely to mean higher overall charges.
Long void periods would have a major impact on landlords. There could be other negative consequences too
Docherty agrees and warns that the changes could also drive some landlords out of the market at a time when there are already well-reported shortages of student accommodation.
“The proposed changes may lead landlords to choose standard tenancies for more rental security, leaving fewer options for students and possibly pushing up rents further.”
She adds that, although the legislation will apply to HMOs, it won’t cover owners of PBSAs, which are part of the government-approved code such as the ANUK/Unipol National Code. Owners will have to register with a relevant body to avoid indirectly falling within the new act, she warns.
Undeterred investors
Despite these challenges, many BTL investors remain committed to the student housing market.
Some lenders are even looking at ways to attract new investors — namely the students themselves.
Increased stamp duty and higher taxes are dissuading many parents from being landlords
Hollingworth says schemes such as ‘Buy for Uni’ from Bath and Loughborough building societies enable students to get on the property ladder, albeit with parental support. These schemes enable students to use rental income from others to support their borrowing, and by taking a guarantee on parental assets allowing up to 100% LTV.
Although most students will not be getting to grips with stress tests on rental cover while also studying for a degree, these developments show there are still opportunities for BTL investors — despite the tougher regulatory environment and what is fast becoming a very different student landscape.
This article featured in the November 2024 edition of Mortgage Strategy.
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