Investors often look to diversify their portfolio to mitigate the risk caused by factors that affect the market or asset class. Property investors may achieve this by owning a mix of asset classes to stabilise their income. Commercial and Student property are common markets used to achieve this.
The Commercial property market is well-established, usually made up of Office, Retail and Industrial assets. It can be entered into in three ways. Firstly, by Direct Investment – where an investor buys a whole property or a share in a property. Or by Direct Commercial Property Funds – investing directly into property portfolios. Finally, Indirect Property Funds – investing in property companies on the stock market.
The benefits of investing in commercial property include a longer period of guaranteed income over the lease term. In the UK this term is on average 8 years. The returns are also generally higher than that of other investments such as Bonds and Gilts. Being able to invest in a number of different areas will spread the risk of the portfolio and can help ensure continual income. With certain commercial properties, you can diversify further by splitting the space for multiple parties. Property is seen to be a good investment as, in addition to the regular income, there is also a very good chance of capital growth. There is also the benefit of a more professional relationship with your tenant, and the majority of call-outs will be between business hours.
However commercial property investments are affected by the economy, there will be periods of over and undersupply within the market which will each have an impact on the investment return. Market conditions will also have an impact on the value of the property due to net initial yields increasing or decreasing. This is also the case with interest rates, as they change the property value will also be affected. Another potential risk is the cost associated with void periods, the property owner will be responsible for the cost of insurance, maintenance, utilities and business rates, as well as any service charges associated with the property. The selection of a tenant can also impact the investment, as a poor tenant covenant will be reflected in the properties value and potentially cause problems in the future if they become unable to keep up with the lease obligations.
Student Housing has moved from being an alternative asset to a mainstream investment, Savills forecasts a 17% increase in investment over the next year. To directly invest in Student Housing investors choose either Houses in Multiple Occupation (HMO) or Purpose Built Student Accommodation (PBSA) properties. Unlike commercial property, which tends to follow the business cycle, the Student Property markets has counter-cyclical qualities, as university applications tend to rise when the economy is performing poorly. This makes it a good area to invest in to diversify a property portfolio.
While there appears to be strong demand for student housing, there are some potential risks to investing in the sector. Most properties are only occupied from September to June, meaning that during the summer months there may be a fall in generated income either from an empty property or from a reduced rent rate, also if a property has failed to let by September, it may be difficult to let again before the following year. There is often a higher level of wear and tear to the property, when compared to leasing to other parties, and may require more frequent maintenance and redecoration. If an HMO licence is required, the cost will have to be covered by the landlord, cost of such licenses vary from £55 to £1,150 depending on location, with a nationwide average of £591.
For Buy-to-Let investments, student property offers the best return. Students often pay more than other tenants and the nature of student houses allows for the intensification of available space. It is not unreasonable to think that a well run, multi-let property can achieve yields of 20%. Although the lease term is lower, usually 6-12 months, growing numbers of university students means high demand for properties in good locations with the right attributes. Students tend to be good tenants, often with parental guarantors meaning the risk of default is low. HMO properties offer much better prospects for capital growth potential and resale value than the PBSA rooms offered in managed buildings. HMO properties are also usually located in inner-city locations where it is cheaper to buy and have good prospects for price appreciation.
For potential investors, both Student Property and Commercial Property should be considered, along with the requirements of the investor. Investors should be able to achieve good returns, providing the correct location is sought. The UK Student Housing market remains strong, despite Brexit, with an established and respected education sector drawing increasing numbers of students from the UK and overseas.
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