Investing in student accommodation

Australia is one of the hottest ‘education destinations’ in the world – in fact, we are ranked third with one in five of our tertiary students coming from overseas, according to the Australian Bureau of Statistics.

This coupled with an overall increase in the number of places being offered by universities is resulting in greater demand for student rental accommodation in Australia’s university towns.

But does this make student accomodation a good investment?

A few years ago John McGrath shared his thoughts on student accommodation in his regular Switzer column.

His thoughts are just as relevant today as when he wrote them in 2013.

Here's what he said:

So what does this mean for investors?

There are essentially two types of student accommodation in the residential property market:

•    Designated student accommodation apartment blocks purposely built and used for student accommodation (some blocks allow owner-occupation by non-students)
•    Normal investment properties located in university precincts, which are often rented to students on a room-by-room basis

Investing in student accommodation is basically a yield play for investors.

With student blocks, you’ll get a great yield and there is usually on-site management to handle the day-to-day chores – thus reducing the workload for you.

Recently I spotted an ad for a student apartment in the heart of Melbourne, which was on the market for $185,000 with a rental return of $310 per week.

That’s a solid 8.7 per cent return and the entry cost is obviously very attractive.

With normal residential investment properties located in university precincts, you’ll pay a regular market price to purchase them but you can then enhance your yield significantly by renting room-by-room and fully furnished. In the university town of Newcastle, NSW, a suburb called North Lambton is very popular with student renters due to its proximity to the Callaghan campus.

Here a four bedroom house that was purchased in the late $300,000s in 2011 is being rented room-by-room, fully furnished for $190 per week, providing the owner with a potential yield of around 10.5 per cent.

Now that’s impressive.

While the yields sound great, there are unique pros and cons to investing in student accommodation.

I asked Michael Conolly, Head of McGrath Network Property Management for his thoughts and we put together a list for potential investors to consider.

Pros to investing in student accommodation

•    Ability to achieve a high yield
•    Strong demand as universities expand the number of places on offer and interest from overseas grows
•    Many students are subsidised by their parents, with some able to pay six months in advance, therefore reducing the arrears risk
•    Many universities run programs to help students find accommodation. Newcastle University has a facility called the Off-Campus Accommodation Database, where landlords and agents can register and list their properties for free

Cons to investing in student accommodation

•    In student accommodation blocks, the on-site management fees can be expensive and will eat into your returns. It’s critically important that you check out all the fees associated with buying in a student building before purchasing
•    While there is strong demand in university areas, you might find turnover is high.  As students form new friendships, they tend to change their living arrangements
•    You might find maintenance costly, as younger renters can have a lesser sense of responsibility
•    When you purchase a normal residential property in a known university area, there can be a stigma attached. If a suburb is known as a ‘student suburb’, this might be off-putting to future buyers and this will impact your capital growth
•    There can be language barriers with overseas students. More than 35 per cent of overseas students in Australia today are from China or India, according to the Immigration Department. Overseas students might be unfamiliar with Australian law and their obligations as tenants
•    Students love to party – and why not, these are some of the best years of their lives so there’s plenty to celebrate!
But this isn’t so great for investors, who might find themselves on the black list of neighbours due to noise issues!
•    Students generally leave town between December and February to return home for the holidays, leaving you with a significant vacancy period

When investing, you have to consider both yield and capital growth

If you want to pursue student accommodation, normal residential properties might result in better capital growth over the long term.

This is because the property could still be sold to owner-occupiers later.

The buyers for student apartments in student blocks are typically limited to investors, so your ability to achieve capital growth is restricted due to the inherent lower demand.

As with all investment decisions, it’s important to carefully weigh up the pros and cons before making a decision and always consultant your financial and tax advisors.

About Kevin Turner Kevin brings together leading authorities on the property market in his weekly Real Estate Talk Podcast. Visit www.RealEstateTalk.com.au