Student accommodation property funding

Student accommodation is a significant sector in the UK property market. The value of purpose-built student accommodation at the beginning of 2020 was predicted to be in excess £53bn - which suggests that it could be a lucrative area for investment.

The UK is among the most popular study destination for students from around the world and international enrolments increased 3.6% in the year 2017-18, to more than 458,000. Higher education in the UK is most popular amongst students from China, India, the US, Hong Kong and Malaysia 

But the days of student accommodation being substandard properties that were rented cheaply on an informal basis have long gone. Today's students - and particularly overseas students which make up a large proportion of the student cohort - are well funded and discerning, and will expect clean and modern housing. Luxury accommodation is springing up near universities and colleges up and down the country as students expect more for their money than ever before, with high standards of comfort and wifi as standard.

In a recent student housing report, property experts Savills identifies the potential of, offering better provision than low-quality university housing stock. Savills suggests that partnerships with universities to upgrade existing stock may be a profitable strategy.

You could expect the overall yield on a standard buy-to-let with a single household tenant to average 5.8% but HMOs - Houses in Multiple Occupation - with student tenants yield an average of 10.2%.

But providing student property is not without challenges.

For many, their student house will be their first time venturing into the renting world and problems can occur. 

• Late rent payment is a common problem that landlords face when letting to students. Students may struggle to pay their rent on time is because their student loans often come in late. It's common to require the tenant to provide a guarantor who, in the event of missed payments, will be responsible for the rent.
• Wear and tear are expected but any damage exceeding this should be deducted from the tenant’s initial deposit. a well-detailed inventory should be done before tenants move in.
• Most students tend to go home during the Christmas and summer breaks, meaning the property could be empty for a month or so. Some will be prepared to pay for these periods. The long summer vacation can be more of a problem. A long void can upset your finances.
• There can be problems with noise and anti-social behaviour which may affect neighbours.

What type of property are students looking for?

The need for quality accommodation may require investment. Converting existing property or building from the ground up can both be profitable. The returns can be more attractive than traditional lets:

• Demand in student areas is strong and predictable
• Student lets tend to offer particularly high yields
• It offers a constant supply of new tenants
• Students may be happy to set up a direct debit or standing order and payment will go into your account once a month

If you have a local college nearby, you can team up with their student accommodation team and they will find and reference tenants for you.

There are two ways to become a student landlord. To acquire and if necessary convert an existing property into a student HMO, or studio accommodation, or to build suitable property.

Funding an HMO as student accommodation

Your property may be categorised as an HMO (House in Multiple Occupation) if it accommodates three or more unrelated tenants who share a kitchen, bathroom and communal living area. If your property is over three storeys and there are five or more occupants, you must apply for an HMO license.

This costs around £500 to £600, depending on where in the country your property is, and usually lasts for five years. Some councils insist that you have an HMO license regardless of the number of students you have, so always make sure that you check with your local authority.  

When applying to provide student accommodation, your local authority will issue you with a set of guidelines that you must carry out.

These include that your property has a gas safety and electrical check, that there is a means of fire escape, that you have installed mains smoke, fire and carbon monoxide detectors on every floor and that you make sure that all furnishings are safe and fire safety compliant. Unlike a standard let, with shared occupancy and one tenancy agreement covering all the occupants, an HMO usually requires individual short-term tenancy agreements with each of the tenants.

With an HMO as all your normal legal responsibilities you must ensure:

• Smoke detectors are installed
• Electrics are checked every five years
• The property is not overcrowded
• Adequate cooking and washing facilities
• Communal areas and shared facilities are clean and in good repair
• Your boiler's gas safety certificate is up-to-date

Investing in student accommodation 

The growing demand for student accommodation remains attractive due to the good yields in the UK. Investors and developers are increasingly looking to develop student accommodation and then hold as an investment with steady and predictable returns - Student accommodation has performed well as an investment historically, and with rental growth outperforming inflation in recent years.

How much profit can you make? 

Where you are in the country will influence your potential profits - but it is safe to say that there could be greater profitability from letting.

So, while a typical four-bed house in the south-west will rent out to a single family for around £800/month, if you were to rent the same space to four students, you could expect to generate a gross income of £2,400/month.

Taking out your expenses such as utilities, broadband, cleaning and maintenance costs, you could easily be looking at generating a net profit of £1800/month for exactly the same property.

The profits from purpose-built accommodation may be higher still. A great deal will depend on the part of the country where you are investing. London property prices are higher and London universities command a premium - it is only natural that student accommodation in London will also be more costly, and potentially more profitable.

On the negative side, properties tend to suffer more wear and tear when let to students and, as a result, you are likely to spend more on maintenance at the end of a tenancy than you would with a traditional let. Students will expect properties to be fully furnished, but you may be able to use secondhand furnishings provided that they are clean and sound. 

The funding available for student property

The stability of the student letting market means that there are many lenders willing to lend funds for the development of student housing. However, finding the most appropriate lender that will lend at the right loan to value and at the lowest rate of interest needs specialist help.

What are the terms for student accommodation development finance?

The terms for development and acquisition finance on student accommodation varies between lenders with some refusing to lend on this asset class and others offering very attractive terms on both the rate and fees. However, getting specialist funding may be essential.

Student HMOs are traditionally seen as unlikely to attract family renters and as often being of poor quality, offering little security for the lender. To make matters worse, the modifications required to turn a property into an HMO, including fire doors and escape routes, individual heating and meters in each room, will further detract from the resale potential. 

An existing buy-to-let mortgage may have clauses preventing you from turning it into an HMO.

As a result, many investors believe that a Commercial Mortgage is needed for HMO property. At Rangewell, we know the specialist lenders who can offer competitive deals for landlords looking to purchase an HMO or convert an existing property, with an HMO mortgage. They may be more costly than a conventional buy to let mortgage but can cover up to 75% loan-to-value.

What about developing student property?

You may be able to acquire an existing HMO and simply fit it out for student tenants - but you may require Development Funding that will allow you to convert a property to student accommodation. 

Development Finance can help you acquire a property and fund work on it - and when the project is finished, it will allow you to refinance the property with a more conventional financial product. It offers some features that make it particularly attractive for this kind of project, including:

• Staged draw-down: you only pay for funds as and when you need them, reducing costs - you don’t have money that costs you interest standing idle in the bank.
• Rolled-up interest repaid at end of term: allows you to use all your liquid finance on build and fit-out 
• Loan amount minimum: usually £200K
• Agreed exit: sale or mortgage finance

The typical terms for development lending are:

• Loans from £500,000 up to several million
• Up to 80% of total costs - this may be made up of 100% of build costs and 80% of land purchase, stamp duty and professional fees
• Lending subject to 65% of gross development value
• Rates from 3.75% for lower loan to value lending
• Lenders fees from 1.5% and similar exit fees on the loan amount
• Terms 6 to 18 months

You may be able to acquire an existing HMO and simply fit it out for student tenants - but you may require development funding that will allow you to convert a property to student accommodation. 

Development Finance can help you acquire a property and fund work on it - and when the project is finished, it will allow you to refinance the property with a more conventional financial product. 

What criteria is taken into account when applying for student housing development finance?

With our help, finding a lender for both licensed and non-licensed HMOs can be straightforward, although each lender has its own approach and criteria, and costs may be a little higher than comparable buy to let arrangements,

Some will base their valuation on the price achieved if it were purchased as a single dwelling, restricting the amount that you can borrow. However, others will base their valuation on the achievable rental income or ‘investment value’ when making their lending decision.

Some may only consider you for an HMO mortgage if you are an experienced landlord. Most will make it a condition of the mortgage offer that you are deemed ‘fit and proper’ to run an HMO. 

Other considerations may include:

• The number of letting rooms and expected or actual rental income
• Location
• Your experience as a landlord
• Whether you’ll be managing the property yourself or using managing agents
• Types of tenants
• Loan amount
• Your credit rating