Amid the ongoing demand for student accommodation, Secure Trust Bank Real Estate Finance has experienced an upturn in property finance enquiries for houses in multiple occupation (HMOs). David Burke, Relationship Director at Secure Trust Bank, discusses the reasons behind the increase and the key considerations for those investing in student accommodation.
Is it that time of the year already? Universities across the country have once again opened their doors to the next generation of budding academics. When it comes to student housing, your first thought may well be the towering purpose-built student accommodation (PBSA) developments that are regularly cropping up across the nation - and with good reason. PBSAs have been the go-to, particularly for first year university students, whether because of the social opportunities they provide, convenience of location, or the incorporated modern amenities, such as study areas and gyms.
A number of factors, however, lead students towards the alternative living option, namely, HMOs. But what are these factors, and what should investors looking to enter this part of the student accommodation sector consider beforehand?
Overcoming costs
Investors and students are alike in the sense that cost is one of the most important factors for any decision they make. From a student's perspective, the current cost of living in a PBSA is likely to eclipse what they receive in loans, encouraging more to consider the viability of HMOs, which are typically cheaper.
On the flip side, for developers, building a PBSA in the current climate may feel quite risky. When it comes to construction, material costs may be gradually coming down, but PBSA developers are now having to face the challenge of rising labour costs. As outlined in a report published by Arcadis in September, labour costs are expected to drive inflationary pressures in the upcoming construction cycle, as workloads increase and competence requirements tighten, with fewer opportunities to source labour from overseas.
That being said, a robust workload pipeline and improving economic conditions indicate a more optimistic outlook for the construction sector, with fewer projects now subject to delays. It's safe to say that as demand for HMOs continues, they will likely become more expensive for students to rent. Yet, given the often improving offering in terms of quality of living, this should encourage potential occupants to make the shift from typical PBSA.
Investors are encouraged to consider the upfront costs of refurbishment and maintenance required to bring converted properties up to the rising standards of today's HMOs. When setting out the investment strategy, it's important to remember that properties with multiple bedrooms and bathrooms can attract more tenants, increasing income in the process, but larger communal areas, such as the kitchen and living room, should not be sacrificed. The overall offering must be a good standard to attract students, who have often just experienced a PBSA - this will maximise income.
Location, location, location
Besides cost, location is another factor at the top of a student's checklist when picking a place to live. Naturally, demand for tenancy won't be high if the house is based an hour away from university, and no student wants to walk that far on a cold Monday morning. A short travel time, with accessible public transport, is essential and, if a HMO is located close to a university, then it'll likely also just be a short stroll away from shops and, most importantly, nightlife.
Location is equally as important for investors with multiple HMOs, and they should look to keep a portfolio of HMOs in close proximity. Doing so will ensure that maintenance and cleaning between tenancy contracts, typically at the end of July, are much easier to do. If overlooked, operating costs and time for property management can quickly rack up.
'Hygiene' factors
There is a whole host of other factors that students are likely to consider when choosing their home for the next year, or possibly beyond, such as safety and wellbeing, noise pollution, and even how arduous the journey from home to the lecture theatre is.
Gone are the days of students being moderately satisfied with a cramped living space. Instead, they rightly want to live in comfortable surroundings, that are aesthetically pleasing with a sense of community, two factors that play into the hands of those investing in HMOs and house shares.
Providing a sizeable space for students is important, and investors should bear this in mind when taking on new HMO projects and looking to re-apportion the space available. Students will no longer accept living in cramped spaces, instead seeking comfort, wellbeing, and a healthier and sustainable living environment.
Regulations and restrictions
Talking of regulations, the most important regulation that developers should be aware of is Local Authorities Article 4 Direction (A4DS), which enables local authorities to limit development rights in certain areas, including the prohibition of building or renovating properties into HMOs.
Prior to applying for planning permission, developers should speak to a local planning consultant to find out how they can increase their chances of a successful application. It should go without saying, however, that the property should not be in an area that currently restricts the construction of HMOs.
Other regulations include the shared house living standards, which make sure that a house isn't classed as overcrowded and is kept clean and safe with no hazards to the tenants' health.
Getting the funds
Investors that consider the cost, convenience, and regulations associated with these properties are already ahead of the game and therefore much more likely to succeed in their bid to access HMO finance.
When it comes to schemes targeted specifically at students, these properties and portfolios should not be viewed in the same way as other schemes and as discussed, there are plenty of considerations beyond just yield.
As an experienced lender in this specialist area providing student accommodation development finance, Secure Trust Bank is well versed to understand the challenges developers face and is ready to support those prepared to the exciting and potentially rewarding HMO sector.
Find out more about Secure Trust Bank Real Estate Finance, or visit Student Accommodation Development Finance area.