Student accommodation imbalance is a perfect opportunity for investors

Anna Lewis, commercial director at Castle Trust Bank, explains why a current student-to-bed shortfall in major student cities presents an opportunity to property investors, and which new products on the market provide a more efficient way of funding student HMOs.

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Anna Lewis | Castle Trust Bank
20th June 2024
Anna Lewis Castle Trust new
"A growing number are recognising the potential of the supply/demand imbalance and the prospect of higher yields."

The general mood around the property market may have been muted in recent years, but opportunities for investors have continued throughout. The imbalance between tenant demand and the supply of rental property has been well-documented and, for those investors seeking higher yields, there are other areas where the supply/demand imbalance weighs in their favour.

Student accommodation is one such area. Earlier this year, Savills analysed the student accommodation market across 20 of the UK’s largest student cities, finding that while there were more than 1.3 million full-time students, they only had access to around 500,000 operational beds. The firm found that an extra 234,000 beds are needed to bring the student-to-bed ratio down to 1.5, which is considered to be a more sustainable level.

The report found that Glasgow was the city with the largest student accommodation supply/demand imbalance, with an additional 22,000 required to meet current requirements. According to the report, the city has a student-to-bed ratio of 3.8.

Savills says that there are currently five cities with a ratio of over 3.0, with London and Bristol following shortly behind Glasgow at 3.6 and 3.5 respectively.

This presents a particularly attractive opportunity to property investors as the yields on a student HMO can be far higher than a residential home let on a typical AST. Property consultant and auction house, Allsop, says that yields on HMOs can be as high as 12-13% in some university towns and cities.

When it comes to making the most of the opportunity, there are two main options for SME investors. They may, for example, choose to purchase an existing student HMO in need of work, to carry out light refurbishments to improve the quality of the property and potential to attract higher rents.

Alternatively, investors may want to consider adding to the number of existing student beds by buying a large single dwelling for conversion to an HMO. Given the yields they can provide, these properties come to market infrequently, and an investor can potentially increase their returns by carrying out the required conversion.

A heavy refurbishment bridging loan can provide the capital an investor needs to purchase a property and complete the renovations to convert it to an HMO and at Castle Trust Bank, we’ve introduced an even more cost-efficient way for investors to fund the project.

Our heavy refurbishments with drawdowns product enables borrowers to only pay interest on the balance of the loan they have drawn down, with the remaining facility available to draw down at a later date. This means investors don’t have to borrow the whole balance available to them at the outset. Instead, they can stagger their borrowing for when they have costs to fund, such as paying contractors or buying materials. And this means they only pay interest on the funds that they need to utilise.

Student HMOs are just one of the many opportunities currently available to property investors and a growing number are recognising the potential of the supply/demand imbalance and the prospect of higher yields. With innovative products, like a heavy refurbishment with drawdown bridging loan, they also have a more efficient way of funding this opportunity.

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