x
By using this website, you agree to our use of cookies to enhance your experience.

Why student pods are not fit for purpose

Thousands of student pods are being built in major university cities across the UK to provide accommodation for the burgeoning student population, which increased by 4% in 2014. However, I believe 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, for example, are on offer from £50,000 and investors are promised guaranteed returns of between 8%-10% for five years. In London, investors can buy student pods in Greenwich from £82,500 with 10% guaranteed income in year one and projected returns of around 9% thereafter.

The fact is that students are not prepared to pay a premium price for students pods and for many it is not their preferred choice of accommodation. Recently, we conducted research amongst 100 second year students and over 95% 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 a 8-10% annual return, on a relatively low capital investment. However, this return is usually based on an annual rental rise of 4% and monthly rental income of between £150-£160 per month. I think this annual rent increase is unrealistic because if you remove London from the stats, then annual rent rises are between 1-2% 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 may well 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 underperforming 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 £3m.

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, selling a student pod will encounter problems. For example, who decides the market value? As a piece of real estate per sq metre it is very expensive (double the average market value),  there is no established resale market. Who will sell it? Is it an investment, or is it a piece of real estate?

*Mish Liyanage is managing director of The Mistoria Group

Comments

MovePal MovePal MovePal