The student rental market presents a compelling opportunity for landlords who have seen their profits battered by buy-to-let tax changes, say experts.
With higher rental yields than those available on standard BTLs, it is no surprise that this sector of the market is receiving closer scrutiny from investors. But the regulatory burden has increased following the expansion of licensing requirements for houses of multiple occupation last October. Brokers are well placed to play a pivotal role in helping student landlords access the best products from specialist lenders and understand their obligations under the new rules.
Demand for accommodation is on the rise as official statistics show student numbers have grown in recent years to reach 2.3 million in 2017/18, the latest year for which data is available.
Rental yield
Edinburgh tops the table as the university city with the best rental yield in the UK, according to research by flatsharing website Ideal Flatmate. While there are many ways of calculating yield, the website ranked university hotspots by the most basic measure of annual rents as a percentage of house prices. It found that property prices were on average £224,935 in the Scottish capital, while monthly rents were £1,456, giving a yield of 7.8 per cent.
The area surrounding Nottingham Trent University was a close second, with an average house price of £134,241, monthly rent of £862 and a yield of 7.7 per cent. Leicester was next, yielding 7.5 per cent, then Dundee at 7.1 per cent and Liverpool at 6.9 per cent. Brokers are reporting a growing interest from clients in this area of the market.
Dynamo founder and chief executive Ying Tan says: “I think the tax clampdown has inadvertently made student rentals more appealing as it has reduced landlords’ earnings, which has pushed them to look for higher yields. The big university towns offer good opportunities but there are also plenty of smaller colleges where there is not much rental supply and a lot less competition.”
Tan believes attitudes to the student market have evolved and the sector has professionalised.
“After the credit crunch lenders really pulled back as they deemed it a high-risk area, but that was a bit of a misconception. Standards have risen and quite a lot of specialist lenders have now entered the market so there are many more options than in previous times,” he says.
Tax clampdown has inadvertently made student rentals more appealing
Mortgages for Business managing director Steve Olejnick shares Tan’s positive outlook on the sector.
“Landlords are certainly looking to get their best yields so we are seeing more going into HMOs in student areas,” he says. “They are also looking at HMOs for professionals.
“We are seeing more activity around the universities in Birmingham, Canterbury, Liver-pool, Newcastle and anywhere where landlords can get away from London’s very low-yielding stock.”
Olejnik says the availability of products has increased and competition is strong, with plenty of supportive specialist lenders such as Aldermore, Axis Bank, Fleet, Kent Reliance, Keystone, Landbay, Paragon, Precise, The Mortgage Lender, Shawbrook and Zephyr.
“The bulk of these deals are now being done in a limited company capacity. Most lenders want to see some experience in BTL before they will be willing to lend to a borrower on an HMO. They will typically go up to eight bedrooms, but above that you will be looking at commercial lenders. The majority of professional landlords are looking at five-year fixes at the moment and the average is probably around 3.5 per cent.”
Olejnik explains that is partly because of the Prudential Regulation Authority’s rules, which mean lenders have to stress test a mortgage based on its pay rate, so a five-year fix where the rate stays lower for longer often enables the landlord to borrow a bit more than they might on a two-year deal. However, he adds: “It is also because many landlords like certainty of payment and peace of mind.”
National Landlords Association chief executive Richard Lambert says: “Over the past 20 years or so there has been a big increase in the number of students, but also an increase in university-owned accommodation as well as a range of other providers coming into the market with purpose-built blocks, such as Unite. But what you find is that, even if students can stay beyond the first year in university accommodation, there is still a proportion who want to get out and go and live under their own terms and conditions, so they look to the private rented sector.”
Lambert says the most successful student landlords tend to be those who specialise in the sector and buy several properties in an area they are familiar with. He points out that there is a specific cycle with student lets as tenancies are normally between 10 and 12 months, with the property often vacant over the summer so the landlord can carry out refurbishment. Wear and tear is often greater than with other types of BTL and students may have very specific demands.
“They will judge a property not just on whether it has
fast broadband but also on how effective the range is, so the signal must be good enough to allow each tenant to be able to work in their own room,” Lambert says.
Landlords typically benefit from having the students’ parents as guarantor on rental payments and can also get free marketing if their property is approved by the university as part of its list of suitable local accommodation.
Licensing changes
However, on the flip side, landlords have had to deal with the fall-out from licensing changes, which meant that last October 177,000 more properties in England became HMOs overnight. That is because the general definition of an HMO changed, from five or more people making up two or more households in a property of three or more storeys, to the same number of people and households but spread over any number of storeys. On top of this, individual local authorities have the right to set their own, stricter definitions of HMOs, which may catch even more properties under licensing requirements.
BTL has always been a broker-led product, but the area os student lets it absolutely has to be
Lambert says there are huge differences in licensing fees charged by councils around the country, ranging from £300 to £1,100 for five years.
Keystone Property Finance chief executive David Whittaker says students who find out that their landlord did not apply for a licence when they were required to can claim a rent rebate or refuse to pay. Worse still, the landlord would not be allowed to evict them.
Whittaker says mortgage advisers can add value here if they take the time to understand the licensing rules in particular locations so that they can support their landlord clients.
“BTL has always been a broker-led product, but I think in this area it absolutely has to be. If a landlord just went on to the internet and typed ‘buy-to-let mortgage’, they could waste many unhappy hours and pounds.”
Similarly, landlords who took out a BTL mortgage with a mainstream lender some time ago may now find their property has been reclassified as an HMO and falls outside standard criteria. This means they are likely to need the help of a broker to find them a new lender if they wish to take a further advance.
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Other challenges are emerging for lenders and landlords alike. Fleet Mortgages chief executive Bob Young says it is becoming harder to find valuers who will take into account the investment potential of an HMO such as a student let.
He says big surveying firms are comfortable with residential properties and simple BTLs, but are cautious about HMOs.
“Take two semi-detached houses side by side where one has been converted into a four- or five-bedroom student let that could be earning £3,000 a month. Meanwhile, the house next door is being sold as a family home, which would be let for much less. Getting a valuer to take investment income into account on the HMO is difficult. Like a lot of lenders, we are looking around the market to see where we might go next. We are OK at the moment but we can see there will come a crunch point where we need a different solution.”
When hunting for the best student let opportunities, landlords should be careful not to focus solely on income, says Young. “It is a payoff between yield and capital growth. There are parts of the country where you might get a yield of 13 per cent, but absolutely no growth.
In other places the yield might be low but capital growth over time is huge. As a landlord you want to balance those two things.”
Some landlords may be only just getting to grips with their new obligations under HMO licensing rules while at the same time adjusting to the scaling-back of tax relief on mortgage interest, but there are still opportunities for good returns in the student rental sector. The regulatory upheaval presents brokers with an opportunity to demonstrate their expertise as they guide clients through the changes and forge stronger relationships for the future.
