Funds investing in student accommodation could provide a regular return.
Regular readers will know that, as well as liking more adventurous investments, I'm a big fan of relatively secure investments that can provide a decent income year in, year out. Ideally, they should not be linked directly to the economic health of the country, or the stock market.
In the past I have highlighted the virtues of ground rents and primary care property funds as stable income generators. These are unlikely to be savaged by the next recession and should form part of most income investors' portfolios. This week, I'm highlighting another investment opportunity within the property sector -- student accommodation. It's not without risk, of course, but on balance it's an attractive investment.
Five reasons to invest
- Higher education is a secular growth story. In the last 13 years, the number of students has increased by an annual growth rate of 2.5%. Not very high? Well maybe, but it's been consistent; and that's comforting if you're after a stable income with none of the shocks of equity dividends. Furthermore, there is no sign from any political party that growth will slow. In fact, the opposite is the case.
- Student accommodation is truly counter cyclical. You can diversify away business risk. This year, for example, while retail sales, capital investment and employment dropped liked a stone, the Universities & Colleges Admissions Service (UCAS) reported a 12% rise in student applications as recession increased the attractiveness of education.
- The big worry of any property investor is voids, periods when properties lie vacant without tenants. This is rarely a problem with student accommodation. Most large university towns report 97% to 100% occupancy levels, according to property experts at Knight Frank.
- Rental returns are high and increasing in line with, or in excess of, inflation. Student accommodation rents are expected to increase by 5% per year over the next two years and UNITE Group (LSE: UTG), a major player in this sector, last month announced like-for-like annual rental growth of over 9% for its student housing blocks. It also sold one of its properties for a 4% premium to its June book value.
- One of the impediments to anyone with a good growth story this year has been the credit crunch, and the unwillingness of banks to lend money. This is not a problem in the student accommodation sector. The supply and demand dynamics, coupled with the secure and increasing rents mean that banking finance is available for up to 65% of asset value, and at reasonable rates compared to rental yield.
And two not to
There are two downside risks, as far as I can see.
- There is the old economic certainty that where excess returns are being earned, money and construction will flood in until supply meets, or exceeds, demand and returns reduce. The need for proximity to university grounds and planning restrictions mean this is less of a threat than in other property sectors, but nevertheless it's one to watch out for.
- You have to expect with a property investment that liquidity can sometimes be a problem. If you need to sell, you may not be able to do so as quickly as with equities.
A limited number of funds
So, if you think this sector is worthy of some of your investment pot, what are the options?
The obvious answer is to buy and let. If you've got the deposit money, a friendly bank and a child at university who would otherwise be paying rent, this may make sense.
Speaking for myself, I would rather dine on raw eggs than become a student landlord. I remember my stint at university -- barely house trained, it seemed to revolve around parties, drinking, late nights and occasional study. House care and house work figured not once in three years.
The obvious alternative to direct investment is collective funds. Here the choice is both limited and not ideal. There are basically only two candidates and a fund of funds.
The Brandeaux Student Accommodation Fund was launched in 2000 and has been a pretty consistent performer. It aims to deliver 8% to 10% annualised returns and seems to have met that objective. Outstanding compared to many other asset classes.
Year to date it has returned 8.2% according to Trustnet. However, with reference to my warning about liquidity and like many other property funds, redemptions were suspended for three months, until March this year. Measures have since been put in place to increase liquidity. It's domiciled in the British Virgin Islands and not subject to FSA regulation.
Braemar Student Accommodation is another offshore fund which has a limited track record, having launched only a year ago, but has generated high returns. It still needs to prove itself, in my opinion.
There are two other groups involved in this market; UNITE and UCT. However both are aimed at institutional investors, whereas Brandeux and Braemar are both available through IFAs.
My favoured route into this market is the Coral Portfolio SAF, a fund of funds, based in Luxemburg and subject to EU law. This investment enables exposure to all the funds mentioned -- and others. It has UK distributor status and is available via financial advisers and life platforms.
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