Student ‘pods’ that have been sold in large numbers throughout Southeast Asia are “not fit for purpose” according to one property investment firm.
Currently, thousands of student pods are being built in major university cities across the United Kingdom to provide accommodation for the burgeoning student population, which was up 4 percent year-on-year in 2014.
However, according to new report by The Mistoria Group, a student property investment specialist, student pods are failing investors as they are not ‘fit for purpose’.
Developers are selling investors pods or studios that offer en-suite rooms in new modern city centre buildings, complete with gyms and cafés. For their money, which can be as little as £40,000, investors are being promised a ‘rental guarantee’ for a set number of years with management of the property and finding tenants taken care of.
Student pods in the North West of the U.K. are on offer from £50,000, and investors are promised guaranteed returns of between 8 percent and 10 percent for five years.
In London, investors can but student pods in Greenwich from £82,500 with 10 percent guaranteed income in year one and projected returns of around 9 percent thereafter. There are many more examples throughout the country.
Jerry O’Brien, Senior Manager at The Mistoria Group explained that students are not prepared to pay a premium price for a ‘student pods’ and it is not their preferred choice of accommodation.
“Recently, we conducted research amongst 100 second-year students and more than 95 percent said that they would not consider living in a pod, when higher quality accommodation is available, at a more affordable price.
“Without doubt, the monthly rents of student pods are often over-inflated. These ‘pods’ are marketed to investors with the promise of between an 8 percent and 10 percent annual return, on a relatively low capital investment.
“This return is usually based on an annual rental rise of 4 percent and monthly rental income of between £150 and £160 per month. The annual rent increase is unrealistic, because if you remove London from the stats, then annual rent rises are between 1 percent and 2 percent on average.
“Over the last three years, we estimate that between 15,000-20,000 investors have purchased student pods in the belief that they will make good returns on their investment. In reality, the student pod market will implode as investors will soon discover that the returns are not what they were promised.
“In fact two years ago, the Hong Kong Government banned the construction of student accommodation as they were failing investors. There have been a number of student pod schemes that have stopped paying out the guaranteed rents soon after completion, and investors have then discovered that the real market rate for the rents is much lower, reducing their yield. This has left investors with an under performing asset that is difficult, if not impossible to sell, at an acceptable asking price to the investor.
“Just a couple of months ago, Middle England Developments (MED), a Liverpool development firm at the forefront of the buy-to-let student property went into administration, with overall debts to creditors estimated to be as high as around £3 million.
“If you want to invest in student property, you are better off buying a HMO (House in Multiple Occupation) property which can provide an 8 percent minimum cash rental yield and a typical 13 percent total cash yield, including 5 percent capital appreciation.
“Unlike ‘student pods’ you can apply for a mortgage and there is a buoyant market for this type of student property. If you are building a portfolio, you can lend on your equity in the HMO to fund further investments.
“Student pods are not considered to be individual properties and therefore it can be difficult to secure a mortgage.
“What’s more, with a normal buy-to-let you can sell the property at any time on the open market, through a reputable estate agent and expect a reasonable capital appreciation.
“However, anyone selling a student pod will encounter problems. For example, who decides the market value? As a piece of real estate per sqm it is very expensive (double the average market value), but there is no established resale market. Who will sell it? Is it an investment, or is it a piece of real estate?”
Andrew Batt, International Group Editor of PropertyGuru Group, wrote this story. To contact him about this or other stories email andrew@propertyguru.com.sg
