October 28, 2010 – 2:35PM
In the annals of high risk property investments, arguably none has become a riskier place to put your money than purpose-built student accommodation.
While analysts and pundits endlessly debate whether it’s better to target investment properties for capital growth versus rental returns, the argument is ultimately about what kind of balance an investor should strike between the two strategies in order to get long-term benefits from both. But that’s not the scenario facing many investors who buy into the purpose-built student accommodation market, which often deliver substantial rental yields at the cost of marginal levels of capital growth.
But even that benefit looks, increasingly, to be a thing of the past.
It’s only been in the last five to ten years that these types of specialist developments really burst on the scene, riding a massive wave of international student enrolments in Australian universities and technical colleges.
By 2009, international student education had become the country’s third largest export industry — worth $18 billion – nearly double what it had been five years earlier.
Developers rushed to embrace the trend because demand for accommodation around educational precincts was skyrocketing and the projects offered a better bottom-line than building traditional owner occupier or investment apartments.
Purpose-built student apartments are comparatively cheaper to build — the units are smaller, meaning more of them can be packed into a building.
Typically priced at $150,000 to $300,000, they were sold to investors as a cheap way to enter the market that would deliver substantial rental returns. Some also emphasised their prime inner city locations as source of potentially strong capital growth.
But here’s where things get a little murky. Despite an explosion in the number of developments coming onto the market in the last five years, very little is actually known about the student accommodation sector as an asset class.
No major analyst group tracks the market’s across-the-board performance in terms of rental yields and capital growth. Most what is known is based on anecdotal reports, which should, in itself, set off alarm bells for wary property investors.
Generally speaking, purpose-built student apartments do deliver above-average rental returns compared to other apartment developments. The rental yield on a student apartment is estimated to average between 6 per cent to 8 per cent. In comparison, the current rental yield for unit in Melbourne is 4.07 per cent, Sydney is 4.91 per cent, and Brisbane is 5.02 per cent. But it’s in terms of long-term capital growth where student accommodation really runs into trouble.
Take the case of the Melbourne inner city suburb of Carlton, which has become a hub for servicing the accommodation needs of the University of Melbourne, Royal Melbourne Institute of Technology and a countless number of small English language, business, technical and other schools. The median value of a unit in Carlton fell 0.27 per cent in the year to September, according to Residex.
The suburb immediately adjacent, Carlton North, which isn’t as dominated by purpose-built student housing, saw an increase in value of 5.86 per cent.
In fact, the suburbs that collectively make up Melbourne’s inner north and west saw an overall rise in unit values of 12.06 per cent over the same period.
Capital growth for Carlton over a 5-year period is similarly poor compared to nearby suburbs, the immediate region, and the city overall. (Rental returns, on the other hand, are dramatically better. Carlton’s yield is 6.18 per cent, compared to 4.09 per cent in Carlton North, 4.44 per cent for the surrounding area, and 4.07 per cent for the city).
Stories of investors who’ve bought a student apartment only to eventually sell it years later for a price that delivers a only a modest profit, or even at a loss, are more common than you might think.
The major reasons why? Stock is plentiful. Turnover is also high, with many students opting to stay for only one year before moving into more traditional shared accommodation with other students. Purpose-built student apartments also can’t be leased to anyone else but students, limiting their attractiveness to just one type of renter and one type of buyer.
With overseas student enrolments now on the decline, the market is expected to further feel the pinch as vacancies rise and rents decline in the face of renewed competition for tenancies. If yields drop, there isn’t anything really left.
extracted:sydney morning herald