Are any asset classes overvalued, or experiencing an “investment bubble”?
Yes, blue chip dividend paying income shares are deemed to be overpriced. As everyone is seeking income investors have paid higher prices for these shares and yields have contracted. Shares like Reckitt Benckiser and Unilever are trading way above their long-term average price/earning ratios. Is this a bubble? Probably not. They are great companies. But it does mean that they are overpriced and buying in now would be foolish for yields of between 2.2% -3% when you can purchase student property with good fundamentals that fetch an annual yield of 8% and above.
What if I decide to invest in student property, is it overvalued?
The price of student property is dictated by the yield that be achieved, which is generally in-line with inflation.
Individuals could invest in a student pod that costs £50000 and offers a yield of £5000 or 10% per annum. Obviously in the future if they decided they wanted to sell that unit at a profit for £55000 yet the rental yield has not gone up, future investors would only be achieving a yield of 9%, which makes the investment less attractive overall and be harder to sell.
Student property in sought-after areas should be experiencing increases in rent, ensuring that investors can advertise their unit at a higher price whilst it manages to attain the same yield, making the investment as attractive as it was originally. If rents increase and the yield is now £5500 per annum, units can be sold on for £55000 still a 10% yield, thus the investment retains its original appeal.
What advantages do student property investments have over residential investments?
As students tend to occupy a unit for an entire year there tends to be a lower vacancy rate when compared to residential property which ensures a consistent income stream for the investor. Students will find something suitable and settle there, whereas tenants staying in residential property may move if their work dictates it, or if they have a change in personal circumstances. Investors can take steps to minimise the detrimental effect on the property being vacant though, as rental insurance can cover the 3-month period until eviction takes place and squatting is now illegal.
Student property investments are usually “hands-off” as the development is usually run by a management company on the investor’s behalf. The job of finding new tenants, exchanging contracts and the day-to-day running of the development will be undertaken by the management company. This is ideal for overseas investors or business people who cannot be physically present to do these things, or cannot spare the time to.
Can I obtain a mortgage to purchase a student property investment? What about residential property?
Investors generally can’t obtain mortgages unless they already have property in the UK that they could use as collateral. It is wise to purchase the first units with cash, investors can buy Phoenix Place student pods from £49,950 and use that to secure lending for future purchases. Residential properties in London and over £150,000 in Manchester could potential obtain finance with 40% deposits.
Can I sell on student property easily, and for a good price?
Although a key benefit of owning residential property is that it can often be sold on for a considerable profit if carefully selected in an area with flourishing fundamentals, that it not to say student property cannot achieve similar rates of capital growth.
If the development is well-managed and in a good area, it can be re-sold for a profit too. Property investment company One Touch Investment recently assisted an investor with a resale of a student property investment. The investor needed to release some equity so had decided to sell on two student units in Liverpool. They were originally purchased at £53,695 and £55,395 respectively, with both fetching a 9% yield. The units were sold on for £57,500 and £59,000, meaning that the investor made a profit of 7.1% and 6.5%.
According to a whitepaper released by Savills in March 2017, at least 300,000 new homes per annum must be built in the UK to really address the shortfall. Political parties have promised the construction of 200,000 (only 2/3 of what is needed), and have consistently fallen short of this figure for over a decade. Looking forward it is highly improbable that supply will ever catch up with the need for such property in the UK, which in turn should keep prices relatively buoyant and resilient. In conclusion, property investments that are carefully selected in areas of good growth and high demand should fetch good returns, and these often perform better than other asset classes. There is clearly a demand for these investments, as the resale example has demonstrated.