Is the student buy-to-let market a "stable investment"?

Demand for student accommodation remains on the up, undimmed by recent tuition fee hikes.

In its latest annual report on the student accommodation market, property consultant Savills asserts: "The student housing market has been a resilient and stable investment during the downturn and that is forecast to continue." The report, UK Student Housing, forecasts a total return of 9.3% for the 2013/14 academic year.

Knight Frank also predicts solid returns, with rents expected to rise by 3% in London and 2.75% in the regions.

As well as offering healthy rental yields, student accommodation has a number of other features that can make it an attractive investment. For starters, it has a low correlation to more traditional asset classes. Adam Davis, director of fund distribution at property investment firm The Mansion Group, explains: "While most other asset classes struggled during the downturn in 2007/08, the fundamentals remained solid for student accommodation. Constant demand means it can deliver a predictable income stream."

Indeed, the supply/demand ratio is the key strength of the student accommodation market. Although student numbers dropped off in 2012 when tuition fees were increased to up to £9,000 a year, intake rates have returned to the levels seen in 2010 (with 2011 discounted, as it was a bumper year with undergraduates looking to beat the tuition fee hike).

Student property hotspots

Strong demand for university places coupled with the affordability of the local rental market make some towns a particularly attractive proposition when it comes to investing in student accommodation.

"We restrict our investments to the top 30 student cities and towns," says Adam Davis at The Mansion Group. "This typically includes the Russell group of universities, plus a few others major university towns."

Savills has also ranked university towns in terms of their appeal to investors, picking nine locations as offering the best opportunities. These are Bath, Brighton, Bristol, Cambridge, Cardiff, Edinburgh, London, Oxford and St Andrews.

Meanwhile, languishing at the bottom of its list, are smaller, more rural university towns such as Carlisle, Farnham, Ormskirk and Pontypridd. Neal Hudson of Savills explains: "The calibre of the university is important, but you do have to take into consideration wider market forces such as property prices and demand."

While student numbers are stable, there is a continuing shortage of property in all the core university cities. For example, according to the investment company GCP Student Accommodation, there are 400,000 students in London, but only 60,000 beds in purpose-built accommodation. This dynamic means rental income can increase steadily and void levels are low - with some landlords able to charge students to hold properties for them over the summer.

Becoming a landlord

Buying a property is one way to tap into these opportunities but, as with any investment, it's essential to select carefully.

"Location is by far the most important factor when buying a student property," says Simon Thompson, managing director of accommodationforstudents.com. "Student preferences have changed in the last few years: while they used to live in student areas away from campus, they now want to be as close to campus as possible."

It's also vital to weigh up the local market, as it can have a significant effect on your return. For example, strong demand in an area for property from owner occupiers will push up prices and reduce your rental yield. However, this demand should help drive longer-term capital appreciation.

You may also want to consider how easy it is to get to the property, as student accommodation often requires frequent maintenance. Although you can pay an agent to manage the property, this will reduce the rental yield.

One solution is to buy a property for a son or daughter to live in while at university, allowing them to oversee any maintenance required. However, Neal Hudson, associate director for residential research at Savills, says this strategy is flawed in the current property market.

"This was an option when house prices were rising by 10-20% a year, but it's not a three-year get-rich-quick scheme anymore and should really be regarded as a long-term investment," he says.

Know your HMO

The size of the property is important. If the property is regarded as a house in multiple occupation (HMO) - if three or more unrelated people live there and share amenities such as a kitchen or bathroom - landlords face additional requirements.

The size of the property will determine your responsibilities. As a minimum, you will need to carry out annual gas checks, ensure fire safety measures are in place and check the electrics every five years. In addition, if your property is at least three storeys high and five or more unrelated people live in it, you will need to obtain a licence for it from your council.

If you plan to buy a family home and convert it into student accommodation, you may need to obtain planning permission. "Large HMOs are attractive, as the number of rooms means they can provide a higher rental yield, but it's essential to check you can get planning permission first, as it is getting tougher in some areas," says Thompson.

One way to sidestep the HMO rules is to buy a smaller property, such as a purpose-built studio flat for students within a larger development. This type of scheme is still unusual but, depending on their success, may become a more commonplace way to invest in student accommodation.

In July, Knight Frank started marketing a scheme from developer Watkin Jones. This offers investors the opportunity to buy a studio flat opposite Birmingham's Aston University. Prices start at £83,500 and investors receive a guaranteed rental yield of 8.25% for three years.

It's important to weigh up the downside of being a student landlord, as these can take the shine off rental yields. Landlords can find that their investments become a major consumer of their time and money. Wear and tear is generally higher than in other buy-to-let properties, and they will need to spend time on references, guarantors and rental agreements.

It's not really something for smaller investors. You'll need a deposit of roughly 30% of the property value to get a buy-to-let mortgage, and if you have a larger HMO your choice of lender will be restricted.

Rent book-free options

Gaining exposure to student accommodation through a fund has been a popular option in recent years, but the Financial Conduct Authority's announcement of a ban on the promotion of unregulated collective investment schemes (UCIS) to retail investors has curtailed that route into the market for most ordinary investors.

"UCIS will be off limits to most investors and, with a more limited number of buyers in the market, I'd recommend taking your money out if you are already holding one of these funds," says Mick Gilligan, partner and head of research at broker Killik & Co.

Although the ban doesn't come into effect until 2014, liquidity concerns and a fall-off in demand resulting from the squeeze have become apparent. Notably, Brandeaux suspended its funds, including its student accommodation fund, at the beginning of July following an increase in redemptions.

But while there may be less choice now, options remain for those who want exposure to student accommodation without the aggravation of becoming a landlord.

One of these is Gravis Capital Partners Student Living, a real estate investment trust (REIT) listed on the London Stock Exchange. The FCA does not categorise REITs as unregulated schemes. The GCP Infrastructure REIT invests in purpose-built student accommodation and currently owns one property, Scape East, opposite Queen Mary, University of London, in east London.

It targets an initial dividend yield of 5.5% and projects a total annual return of between 8 and 10% over the longer term. "The initial public offering was oversubscribed and raised £70 million, so we are now looking to build the portfolio with a couple of other London-based developments in mind," says Tom Ward, partner at GCP. "Once these are completed and have occupancy rates of at least 75%, we will look to raise further funds to buy them."

Another option is a regulated collective investment from The Mansion Group, the HC Mansion UK Student Accommodation Income and Growth fund. This is a non-UCITS (Undertakings for Collective Investment in Transferable Securities) retail scheme regulated by the FCA outside the UCIS ban. It was launched in December 2012 and has attracted £40 million of investment. It seeks to invest in purpose-built student accommodation but also considers property that needs refurbishment.

Both funds have low minimum investments - £3,000 for the Mansion Group fund and the price of a share, roughly £1, plus dealing costs for the GCP REIT - and are available for ISA investments, but liquidity is a concern.

The Mansion Group looks to address this by holding around a fifth of the fund in cash, increasing to 25% for the ISA, but Ward admits the liquidity problem is something investors in any kind of property will always face.