Britain's student Buy-To-Let industry
A critical evaluation of the current demand for student accommodation in the UK including the opportunity to invest in residential buy-to-let student accommodation during volatile economic times.
The researcher has chosen the student buy to let sector for a number of reasons. The topic has received much media coverage over recent months and presents an interesting opportunity to many entrepreneurs. Success stories abound written by those who built multi-million pound portfolios from just a few hundred pounds. In contrast, we read of the “great Buy-To-Let sell-off” with many landlords just wanting rid of their entire portfolios - often at 25-30% below true market values. This study attempts to present a balanced view of Britain's student Buy-To-Let industry in 2010, focusing on supply versus demand.
While the UK still fights its way out of recession, property prices remain at relatively low values and the banks are still crippled with government debt, it is perhaps easy to shy away from this particular investment opportunity. This study aims to unravel the apparent contradiction above and to identify, with substantive evidence, whether the increasing demand for student places at universities will continue to fuel the student Buy-To-Let market. Additionally, the researcher aims to identify niche market opportunities within the sector, in particular the so-called “property hotspots”, using data analysis and other key metrics.
This study will also look at the due diligence and investment strategies required by investors embarking on a Buy-To-Let career - in particular within the student sector. As this study aims to concentrate on the student lettings market specifically, standard residential Buy-To-Let models are of little value here, except to explain the higher yields and increased stability in achieved with student lettings. It is important to examine the link between government policy regarding higher education and supply and demand in the market place.
Strong marketing concepts will be applied to the study to identify any academic trends in the industry. The marketing mix is likely to play a large role in determining the outcome of the study. Market segmentation is important in order to identify the potential market, to assess and forecast demand and to analyse competition in the segment.
Background to Author
The researcher has worked in the Buy-To-Let industry, albeit at the periphery, and has acquired a keen interest in the topic. Working for a large property investment company as part of his year out, the researcher personally raised over £1 million in private investment for his employer, despite the country being in the grip of a deep recession.
With much confusion, and opposing public opinion, as to the worthiness of Buy-To-Let (in general) as a profitable investment option, it seemed that some attempt at detailed analysis would be valuable. Living in Lincoln, whilst attending University, the researcher started to look at student houses as a possible business venture after graduation. The subject then became quite addictive.
I would like to thank all of those that have contributed to the production of this paper. This includes the hard-working industry professionals that have taken valuable time out of their working day to contribute their opinion and experience within the subject. A big thank you goes to all the students for completing a questionnaire.
I would also like to thank the University of Lincoln for their advice and resources available in order to carry out the study. This includes my personal tutor, David Gannon, for the ongoing support, direction and motivation.
Chapter One - Introduction
Historically, Buy-To-Let has not previously been something of interest to the masses - but reserved for professional property owners/ investors. Usually, properties have been self-managed, sometimes by family members. Often, the properties held have been inherited and have been in the family for some time. This has meant that mortgages have, typically, been paid off or have been at very low levels when measured against the property value. Commonly, these landlords have had some interest in, or knowledge of, the building trade so maintenance and improvement works have not presented a problem. Additionally, many of these landlords have lived near to their portfolio of properties, meaning hands-on management rather than ‘armchair investment'. The concept of `Buy-To-Let for the common man` is quite new. In fact, it is true to say that `off-the-shelf` Buy-To-Let mortgages were not available from lenders until very recently. Previously, this type of lending was regarded as commercial and was much harder to obtain.
During the late 1980s and throughout the 1990s, a clear trend emerged whereby private investors (doctors, lawyers, accountants) started to buy second homes with the objective of renting them out. This was the beginning of the `modern-day` Buy-To-Let boom; it almost became something of a fashion accessory to have a portfolio of BTLs. Lenders had, by this time, realised that there was a lucrative opportunity in lending to would-be landlords and were anxious to compete with each other; this competition led to the main operators offering very high Loan to Value (LTV) mortgages - often as high as 90% LTV. As competition between lenders increased yet further, special incentives were offered such as 2 year discounted rates. The investment angle taken by these so-called `amateur` investors was not monthly income but simply long-term growth; almost a pension fund. This premise relied upon one factor alone: that property would always continue to rise in value. Interest rates were competitive and the market became flooded with `amateur` landlords seemingly jumping on the band-wagon. With the benefit of hindsight, it could certainly be argued that these mortgages were far too easy to obtain. Significantly, many of these investment properties were not let to students (or on a room-by-room basis), but rented out on a standard residential Buy-To-Let tenancy agreement - known as a Shorthold Tenancy Agreement (or AST).
From late 2007 through to late 2009 a number of events combined to affect the desirability of the Buy-To-Let market. Principally these were:
* The UK property market turned quite dramatically;
* Britain was heading for a deep and protracted recession;
* Pundits predicted 3 million unemployed by 2009 and people started to worry about job security;
* The banks, reeling from the after-shock of sub-prime lending in the USA, were compelled to all but withdraw lending while the taxpayer bailed out their losses. During this time we saw the failure of Northern Rock and Mortgage Express (the Buy-To-Let mortgage arm of the Bradford and Bingley Building Society) - to name only two.
The global financial crisis led to many of these `part-time` landlords questioning the soundness of their investment strategy. Properties soon became liabilities - not assets - and many landlords off-loaded their portfolios at 25%-30% below true market value for quick sales. Strange (2007) of ‘Buying to Let' portrays a good example of this in an article (‘Mum's the word'). This woman is reputed to have had a BTL portfolio valued at £3 million in autumn 2007, but in an article published by the BBC, in May 2009 she was reported to have lost it all (‘Buy-To-Let Gone Wrong'). It is worthy of note that at this same time, the more sophisticated property investors and landlords were buying back into the market, being able to take advantage of below market value (BMV) properties as a result of the sell-off referred to above. These landlords had a different objective to the part-time Buy-To-Let landlords of the 1990s - they were looking for monthly/ annual yield, not simply long-term growth. As so many landlords had found to their cost, long-term growth does not pay the mortgage every month.
This study aims to investigate if there is (and/or will be) continuing, rising demand for student accommodation and if so, analyse the factors causing the demand. The research will reveal any reasons why investing in residential student buy-to-let accommodation should be a success. Too weak
1.3 Research Objectives
Objectives in order to achieve the aims of this study:
1. Identify what aspects of the industry as a whole involve the use of marketing. Find out what strategies are being used, what communications methods are required and which stakeholders need the use of marketing in order to increase demand.
2. Look at the university towns/cities in the country to try and ascertain the most profitable locations for an investor by determining what makes a ‘property hotspot'.
3. Analyse any growth in students going on to higher education and predictions for likely trends/patterns in higher education participation in the future.
4. Analyse the existing property market as a whole and discover what factors should be considered when making an investment. Discover effects of the global recession, supply and demand, competition and current legislation.
5. Collate some secondary research by conducting a questionnaire on a sample of current students to find out their opinions on student accommodation. It is important to establish whether residential housing or private purpose-built student accommodation (PBSA) is preferred and what factors influence a student's decision to live in a certain area or property.
6. Collate secondary research by holding a structured interview with a local letting agent to learn about their opinions on students as tenants. It will also be useful to ask about achievable rents and what consequences the recession has had on landlords coming to letting agents for help letting their properties.
7. Interview an industry professional with extensive experience in student property investment and also student letting as a private landlord.
Further to the research objectives, predictions have been made in order to compare and conclude findings:
1. Marketing will be essential in this industry, however only within limited areas. Depending on how a property enters the market in the first place, it must be marketed correctly in order to reach the target audience; the buyer. The university will need a marketing strategy in order to reach potential students and the competition in the market will need a marketing communications strategy in order to find out consumer needs and attract them.
2. UK hotspots for residential property investment will tend to be judged by the rental yields that can be achieved in that area. This may be due to a university in the area or a reputable higher education institute. Property values will be irrelevant as the investor in more interested in the rental yield.
3. Higher education participation will have grown and continue to grow but at a steadier pace due to concerns over tuition fees and slower economic growth in years to come.
4. Economic factors will be uncovered that will put a negative aspect on investing in the market, however, depending on individual financial circumstances, these same factors could make the market all the more attractive to some.
5. Students will prefer the privacy and comfort of their own house, especially following their introductory year of university. First year students will be persuaded into purpose built accommodation (PBSA). Price and proximity will prove to be important factors that influence choice.
6. The lettings agent will encourage this form of letting because of convenient and lucrative contracts, committing students for the majority of the year, if not all of it. They will prioritise students who wish to rent on a per room basis because this produces higher returns for the landlord and, therefore, better commission for the managing agent. They will, however, take into consideration synonymous with students is higher maintenance and upheaval. Student behaviour will be raised as a negative aspect.
7. Investment companies and selling agents will hail the state of the market, claiming that now is as good a time as ever to invest. Student property management companies will assert that student tenancies are no more difficult than ordinary BTL tenancies and that returns are consistently higher, both prior to and during recession.
Chapter Two - Literature Review
The most prominent authors have been researched to find out their current views on the main factors that could have an impact on an investment into residential buy-to-let student property. The literature analysis looks at the existing literature that relates to the 7 objectives set out in chapter one. An academic approach has been looked at first to establish any current links to any marketing theories, models or explanations. Exploratory research has been carried out in order to help give an idea of the sources/people that need to be researched further on in the study. With this knowledge the research design can be determined far more time effectively and efficiently.
2.1 Objective One - The use of marketing in the student property industry
2.1.1 Marketing in Universities
In a report into the marketing strategies in of universities in the US, Krachenberg (1972) claimed that the government funding was the pricing variable of the marketing mix and that changing the curriculum was product development.
“NO MATTER WHAT IT IS CALLED, WHO DOES IT or where in the institution it is being done, universities are engaging in marketing activity." (Krachenberg, 1972)
The first paper to be looked at here is a journal by Naude and Ivy (1999, pp 126-136), ‘The Marketing Strategies of Universities in the United Kingdom'. The authors argue that until demand for places at universities becomes less than the universities' ability to satisfy the demand, there is no need for universities to market themselves in order to attract better students or just increase the amount of applicants.
The paper suggests that due to changes government funding, demand for a place at university is rising as the number of accepted applicants is being capped. However since 1992, many emerging polytechnics have been given university status, expanding choice and variety of courses. The argument here is that universities is today's market are having to compete for students and that older universities find themselves having to match the marketing strategies of the new universities in order to defend their market share. .
“Institutions can regard the students as their customers.”
However there are clear differences when determining who or what the actual product is in the situation. Kotler and Fox (1995), argue that students are raw materials, graduates the product, and prospective employers the customer. Naude and Ivy argue that “Students are not buying degrees; they are buying the benefits that a degree can provide in terms of employment, status, lifestyle, etc. Universities which do not already have a strategy will find they have to develop one in order to succeed in the new funding competition”. Since 1989 the UK has entered and dealt with two recessions. Although much has happened that has influenced the industry, Shattock's (1989, pp.201-203) views are still seen as of value. He claimed that “Within a short period of time conditions in the UK have moved from a shortage of higher education, where sellers have been able to determine the conditions on which their services are provided, to a position of oversupply in which the terms are dictated by the buyers”. Today's market conditions are totally different; the UK has an increasingly high amount of higher educational institutions (HEI's) but also the extreme lack of funding for universities and students. Therefore choice is vast however the students are limited as they are not financially able to choose their universities just based on preference.
“Universities are not brands, and the university system is not a “business” to be “marketed”.” (Abaya, 2008)
Abaya, who works in communications for Lakehead University, claims that “applicants go through a very different decision-making process when “shopping” for an institution of higher learning than when they're behaving as consumers of everyday goods and services”. This may be because its nature is different and therefore it requires a different push or pull strategy, a common marketing philosophy derived from the ‘Promotional Mix'. “A push strategy involves ‘pushing' the product through marketing channels to the final consumers. Using a pull strategy, the producer directs its marketing activities towards final consumers to induce them to buy the product (Kotler et al. 2008, pp. 713-715)
Abaya backs this up when arguing that “universities do not need to market themselves because students will simply come; marketing universities is tantamount to commoditizing or corporatizing an institution of higher learning, and both are an anathema to higher education”.
She also claims that universities should spend their funding on improving learning, staff and infrastructure rather than marketing. However she does say that this might not be possible until the university funding formula is altered by the government to ‘level the playing field between longstanding and newer as well as between larger and smaller institutions'. However, despite experience and extensive background knowledge, her thoughts are based on opinion and a potentially a little exaggerated when stating that “strategic marketing and brand building alongside aggressive recruitment may be the only way for smaller universities to survive and flourish”.
2.1.2 Private rented marketing
The next document to be looked at is ‘Modern Marketing Research Techniques and the Property Professional', a study by Levy (1995, pp. 33-40). The journal looks at any ways in which stakeholders in the industry can market themselves. The study is particularly focuses on industrial commercial property and real estate, however, the fundamentals are the same.
The difficulty with this section is that in the property market, whether it's the estate agent or the landlord, the emphasis is on selling as opposed to marketing. The estate agent must sell the property to the buyer, and the landlord must, in theory, sell the property to the tenant. Levy says “It is only in recent times that property professionals have begun to recognise that there is a fundamental difference in these two approaches and to acknowledge the benefits that current research in marketing can contribute to the property discipline”.
A landlord's priority whether it be in a buy-to-let student property or in private halls, is to get his property in the market place and to attract attention from his target audience. Levy is suggesting that the most important marketing strategies here are promotion and advertising which fall under the marketing mix. A successful marketing is essential for any stakeholder in the student property industry.
These advantages have been summarised below (Levy, 1995):
§ Developing effective promotion and advertising campaigns;
§ Matching consumer needs with available premises;
§ Providing superior advice to developers and investors on potential development/ purchase opportunities;
§ Identifying appropriate premises more accurately and quickly.
Above is the traditional decision-making process cited from Jobber (2004, Page 69). In this case the tenant or perspective landlord would follow this process. However, Levy is referring to a decision-making in the property industry that revolves around three principal elements: cost, location and quality of property. She uses a matrix that is multidimensional because she argues that the process involves decided on more than one factor. “The matrix is known as a complete 33factorial design. The decision maker therefore has freedom to make a choice based on whatever factors are considered to be most important. For example, a tenant might choosean average propertyin agood locationbut pay ahigh price. Another might base the relocation decision onlow price, poor locationandexcellent premises”.
Competitors in the market, particularly PBSA, will need to consider this form of marketing when determining where to develop their properties. 2 is an example of the decision-making process of a consumer when ‘evaluating alternatives'. 3 is the decision-making process from a property developer/letting agent/landlord's perspective. In this particular , ‘buy' can be substituted for ‘rent' when taking letting agents/landlords into consideration. Knowledge of the consumer decision-making process will ultimately increase demand thus resulting in increased profit.
2.2 Objective Three - UK hotspots for residential property investment.
This section looks at authors' definitions of 'a property hotspot' for student property investment. There is no right or wrong way to determine whether a certain geographic area is better for investment than others but there certainly are some important factors to research for the chosen area.The information obtained is based on the opinions of those that have profited greatly from the topic or those with extensive economic knowledge and experience, such as financial journalists.
Ahuja, (2008, page 175) defines a property hotspot as an area where properties are available for sale that fall into any 3 of the following categories:
1. Gold - Property prices are predicted to rise at a greater rate than the national average and the rental yield is greater than the national average.
2. Silver - The rental yield is greater than the national average.
3. Bronze - Property prices are predicted to rise at a greater rate than the national average.
Ahuja bought his first property at the age of 24 with just £500. 10 years on, he owns 200 properties worth over £13 million with an annual income in excess of £500,000. Ahuja claims his success was due to basic economics - apart from personal ambitions. “With an expanding population, fragmenting families, an increasingly mobile workforce, fewer properties for sale and fewer council owned properties, the demand for rental properties exceeds supply”.
Ahuja clearly sees capital growth as a key priority along with rental yields.
Kafantaris (2008) supports the case that capital growth should be seen as a major priority when selecting an area to invest in: ‘Many beginning investors make the mistake of viewing their property investments as income driven. Yet I still believe that it isstrong capital growth that will be the key to a successful property investment. Even though the first year or two of holding an investment property can be challenging remember that capital growth builds your equity much faster than loan re-payments and rental income will.'
HOWEVER:[Note by RW : not if mortgage costs exceed rental payments, property value falls below mortgaged value, and interest rates rise faster than rents. Most BTL landlords are on interest only deals! Use this to counterbalance Kafarantis' point!]
It seems both authors value the potential growth of a property's worth very highly. Kafantaris' opinion that investors are ‘making a mistake' if they are seeing investments as income driven is clearly not that of Ahuja, who rates rental yields as the second most important aspect to consider when looking at an area in which to purchase a property.
Zaransky (2006, page 22) suggests that a hotspot is more about finding an area with high occupancy rates and a student housing shortage. ‘Given the unstoppable enrolment growth on the way, the ratios go in only one direction, towards an even lower percentage of landlords to serve the increased numbers of students seeking university degrees. As this trend continues into the next decade and beyond, a nationwide student housing shortage is pending.'
Collins, L (2010) argues that ‘the purchase price of the property isn't necessarily important, the uplift on the value of the property after renovating it and its fantastic proximity to local universities or colleges make it a fantastic investment. However, many towns/cities these days have ‘golden triangles' where the students want to live, if you can find a property in these areas you are more than likely to have it let out constantly, providing a secure, residual income.'
It seems the first two authors, Ahuja and Kafantaris, look at the financial aspects first as a priority; the opportunity to buy a property and add value to them at a faster rate than properties elsewhere in the country. Zaransky and Collins value a property hotspot as a location where occupancy rates are high because the location is favoured. Perhaps the two latter authors' priorities are to keep the properties as longer term investments rather than that of Ahuja and Kafantaris.
However, capital appreciation cannot be predicted. It can be reviewed in the history of an area but it is not possible to even attempt to predict future property values without expert knowledge and predictions of capital appreciation will not, therefore, be further covered in this study.
2.3.1 Objective Three - An historic growth in students participating in further education.
The third part of the literature review is based on evidence from The Department for Business, Innovation and Skills' (BIS) ‘Higher Ambitions: The future of universities in a knowledge economy' (Mandelson, 2009). The department reflect on the success of the UK's education and provides a vision for the government's plans to further improve Higher Education and also encourage yet more students, from the UK and overseas to pursue tertiary education. Included are several elements which could alter the higher education system, consequently having a lasting effect on the demand for student accommodation in the UK.
‘British higher education is a success story. Over the last decade we have pursued the twin objectives of supporting excellence and widening access, and these have proved to be complementary and mutually reinforcing' (Higher Ambitions, p.1). This has been achieved through large investment into educational institutions which has provided a significant increase in the number of students going on to higher education. ‘In 1997 921,000 students in all categories entered higher education and in 2009 that has risen to over 1.1 million' (Higher Ambitions, p.1). Mandelson also claims that by the end of the academic year 2010/11, the total funding for institutions in the UK will have doubled since 1997.
An older document published by The Department for Education and Skills (DFES) ‘The Future of Higher Education' (Clarke, 2003) reflected some of the key statistics proving that participation in higher education has been growing at a sustainable rate. Clarke claims that ‘since the early 1960's only 6% of under-21's went to university, whereas today around 43% of 18-30 year olds in England enter higher education' (The future of higher education, p.2). It is evident that there has been a somewhat vast increase in students' demands for university accommodation.
The government does admit that there is an increase in the number of students studying at university from home, which has an impact on the demand for student accommodation. ‘In 2000/01, 21% of students studied from home, compared to 15% in 1994-5. (The future of higher education, p.12). The Telegraph (2009) published an article last year ‘More university students studying near home to save money in recession', agreeing with the secretary of state, ‘Students are planning to live at home while they attend university in order to save money in the recession, it is claimed. A survey by the National Union of Students (NUS) has found that many young people are thinking of new ways to complete higher education on the cheap'. However, if the Government is to continue to achieve its goal we could see that drop back down and once more see students at their first choice universities, living on site or nearby. The Secretary of State revealed plans to improve funding and abolish tuition fees by saying ‘We will not compromise on fair access and will take steps to ensure young people are not deterred by up-front fees, restoring grants for students from lower income families and abolishing up-front fees for all. In Britain today too many of those born into less advantaged families still see a university place as being beyond their reach, whatever their ability.' (The future of higher education, p.2)
Mandelson recognises these financial obstacles that students face by admitting ‘the sector is not near its full potential with many students still not able to enter the higher education system due to a number of reasons. Access to higher education remains significantly correlated with parental income and wealth. The demand for higher education continues to grow but too many people with the ability to benefit from higher education are still not entering the system.' (Higher Ambitions, p.2)
2.3.2 Will growth continue in the future?
The BIS has set out its goal for participation in higher education in that 50% of young people should enter the system (Higher Ambitions, p.3). This point highlighting that, should participation in higher education increase, a demand for an increase in student accommodation should also correlate. The appeal for foreign students to study in the UK remains strong, thereby enhancing the argument for additional student accommodation. ‘The future of higher education' paper hints that a large increase in foreign students is yet to come. ‘The sector is expanding its role as a provider of education to a growing world market consisting of hundreds of millions of new learners who wish to study in English.'
The Higher Education Policy Institute (HEPI) has been publishing annual reports for the past 5 years projecting demand for higher education. Their latest report ‘Demand for Higher Education to 2029' (Bailey and Bekhradnia, 2008) looks at the influencers of demand for higher education. There must be a substantial demand in the participation of higher education in order for there to be a demand for student housing. A fall in higher education participation could lead to an investment headache for landlords, as they could experience untenanted properties and they could be left to cover their Buy-To-Let mortgages themselves. The report is a projection of population and growth in higher education. Bailey has taken a very statistical approach, looking at demographics such as population, birth rates, social classes and then sorting those factors regionally. All statistics have been obtained from reputable sources: The Office of National Statistics and the Government Actuary's Department.
The report is somewhat similar to the opinions of DFES and BIS by predicting a consistent growth in participation, peaking in 2010. However, Bailey and Bekhradnia argue that ‘After peaking in 2010, the number of 18-20 year olds participating in higher education will decline significantly for the following decade - by more than 13 per cent between 2010 and 2020 - to the lowest number since 1998' (Bailey and Bekhradnia, p.2). With an outlook of rapid growth in demand followed by a sudden drop, the situation is far from ideal for landlords and all those involved in student accommodation. *got to here*
The report looks at populations of certain age groups, giving an approximate idea of how many young adults aged 18-21 there will be in the UK at any given time. The report predicts a growth in population after 2020 until 2029, where growth will be at its highest since 1990 (Bailey and Bekhradnia, p.2).
The government's targets of ‘50% of young people in higher education' doesn't look likely to happen until at least 2020 according to the report. However, the report does not look at aspects other than demographical, so changes in politics such as government funding, tuition fees, foreign students, unemployment rates and the economy, could all play a part in changing the outcome of HEPI's prediction.
HEPI's report is not hard fact. When predicting the future it becomes hard to make any real assumptions. Although it is a very reputable source of data, and the most recent, it does not mean that the views and goals of those at DFES and BIS will be incorrect or unachievable. HEPI have produced 52 educational reports to date and state clearly on their website ‘our research reportshave the most impact in terms of highlighting the key issues facing the sector, and alerting our target audiences to the impact of certain policies on the sector'.
2.4.1 Objective Four - The market in the last 18 months: effects of the recession, supply and demand, competition and legislation.
It is important to analyse the market as a whole before segmenting it and focussing too narrowly on one specific area. It has been quite literally a rollercoaster ride for UK residential property over the last 24 months. A publication was produced by The House and Communities Agency, ‘Monthly Housing Market Bulletin' covers key information on the market from May 2007 until November 2008. The publications touch the surface of what is to come in 2009 with the full scale of the global recession, however it is very accurate as it shows the beginning of the banks seizure on lending and the repossessions that lie ahead. The research was carried out in order to spot trends in the market that could help inform and improve the agency's ongoing projects. The bulletins cover the necessary information to decipher the affects that the economy is having in the property industry such as data on house prices and movements, mortgages and interest rates and the house building industry. The information is crucial when determining viable aspects to consider when investing in a volatile market such as student property. The information provided can be trusted as it is present data collected from a number of British banks such as Nationwide and Halifax, and reputable sources such as HM Revenue and Customs, Land Registry, Rightmove and The Registered Institute of Chartered Surveyors (RICS).
In the most recent document, November 2008, Halifax suggest that house prices were continuing to fall in the recession, meaning that over the past 12 months prior to that, prices had fallen by 13.7%. Likewise, HMRC claimed that by the end of the year the number of properties being sold in the UK fell by 53%. The Council of Mortgage Lenders suggested that successful mortgage applications were few and far between and new mortgage approval rates fell by 57%. It was evident that the UK was embarking on a harmful recession when The Bank of England reduced the base rate by 1.5% to 3% in November, 2008 in an aim to avoid inflation (Monthly Housing Market Bulletin, p.1). At that point Nationwide were claiming that the price of the average house was £158,872, almost £30,000 less that in November 2007, with house prices falling each month since then.
A year later, December 2009, the BBC published an article reviewing the UK house price situation. They claim that ‘since the spring of 2009, house prices actually started to rise gradually each month until December; ending the year 6% higher (BBC, 2009). Davis (2009) suggests that ‘house prices will fall again this coming year by another 10%-15%. The past year's gradual increase in property prices has been nothing but a false dawn.
The general election, tax rises, government spending cuts and unemployment above three million - all this will mean a significant rise in repossessions, both residential and buy-to-let (BBC, 2009).'
Both publications feature valuable forecasts projected by industry specialists which could prove to be valuable for any investors wishing to invest in the volatile economic climate the country is in. The Centre for Economics and Business Research predicted that house prices will continue to fall in value by 25% from their peak to a trough at the end of 2009 and they will not reach previously peaked levels that were seen in 2007 until 2010 (Monthly Housing Market Bulletin, p.2).
2.4.2 The Private Rented Sector
Having researched into the residential property market, it is now essential that the research is continued into the circumstances of the private rented sector where it is predominantly for student accommodation. Research shows that property values over the past 18 months have depreciated substantially, however it must not be assumed that the buy-to-let market will prove to be as lucrative. In order to assess a correlation, research into the current profitability for residential buy-to-let landlords must be carried out.
The Association of Residential Letting Agents (ARLA), conduct precise reports and surveys on a quarterly basis, compiling research from letting agents and investor landlords. The first paper used is the ‘ARLA Review and Index of Returns of Residential Investment' and was produced after the first quarter of 2009. This is excellent data to determine the market in the core of the UK recession. For this report, respondents were asked to submit their results and opinions to ARLA's website. The data covers rents, yields, void periods, types of rental properties, regional differences and is undertaken from 439 letting offices run by ARLA and 288 private investor landlords (ARLA, 2009). The research is conducted with the key objective to keep mortgage lenders up-to-date with agents' requirements as the economy changes.
ARLA's state that ‘rental returns for houses in London are down slightly from 4.9% to 4.8% and values of rented houses in the rest of the UK fell by 1.5%. On balance ARLA's members reported that achievable rents decreased over the last six months on all types of rented property and the proportion of respondents now saying they think achievable rent levels have increased over the last six months, at 11%, is at its lowest level since the question was first asked three and a half years ago. Meanwhile, the proportion who say landlords are currently selling properties has fallen from 7.0% to 4.7% with the result that, for the first time in two years more respondents are saying that landlords are buying more properties than are saying they are selling properties (ARLA Review and Index of Returns of Residential Investment, p.2).' ARLA clearly state on their website that due to inflation, their percentage of returns on investment should not be expected to rise just because prices have risen.
First Quarter's Annual Rates of Return on Buy to Let Investment (Geared Investment)
Rental Yield %)
Average Void Period (days)
Net Annual Rental Yield (%)
Capital Appreciation (% per year)
Rate of return on investment (over 5 years)
Prime Central London
Rest of London
Rest of South East
ARLA: Review and Index of Returns of Residential Investment, p.2
4 shows the UK's best locations for residential property investments on a buy-to-let basis in the first quarter of 2009. The s are based on a geared investment (using money that is borrowed).
So as rental yields saw a slight reduction in early 2009, many landlords decided to hold onto their investment assets in the hope that property prices could only get better and the rental yields would follow suit. As researched from the ‘Monthly Housing Bulletin', in the spring of 2009 house prices began to rise gradually.
The next paper to be analysed that was published by ARLA was ‘Survey of the Private Rented Sector: Fourth Quarter 2009'. This time ARLA used questionnaires to calculate their results. In affect, 4,824 letting offices of ARLA members were sent the questionnaire in November 2009 and 733 validly completed questionnaires were returned by the due date (Survey of the Private Rented Sector: Fourth Quarter 2009, p.4).
9 months on from the last paper, respondents see clear differences in what they think they can achieve in rent levels. According to ARLA's Fourth Quarter document, ‘this time the proportion of respondents now saying they think achievable rent levels have increased over the last six months has risen for the second time in a row since the first quarter, this time from 8.5% to 12.5% (Survey of the Private Rented Sector: Fourth Quarter 2009, p.5).
As the latter stages of 2009 have arrived, more and more research suggests that the end of the property recession is in sight and that achievable rents are increasing.
s 5 and 6 show us whether the forecasts were accurate for the rest of 2009. ARLA's research shows that average rents actually increased quite dramatically nationwide as the year progressed. This information is critical when determining whether to invest into the private rented sector.
5.Average Rents - August 2009 (Houses)
Prime Central London
Rest of London
Rest of South East
Base: All respondents (693)
Survey of the Private Rented Sector: Fourth Quarter 2009, p.21
6.Average Rents - November 2009 (Houses)
Prime Central London
Rest of London
Rest of South East
Base: All respondents (733)
Survey of the Private Rented Sector: Fourth Quarter 2009, p.21
2.4.3 Supply and Demand in the Private Rented Sector
It is crucial to an investor to gather information to determine whether achievable rents are in fact higher when student housing is in demand. First of all current literature must be reviewed to see if this is the case even in today's market, with many properties going under repossession. It must also be determined whether landlords have increased their portfolios of buy-to-let student properties or been forced to sell under the economic pressure of the last 18 months. Student growth has continued, however this trend may have been spotted by large student accommodation firms that have plans to increase their portfolios of purpose built student accommodation (PBSA), also known as private halls.
s 7 and 8 below show The Association of Residential Landlords's analysis of how landlords acted throughout 2009. The table suggests landlords were increasing their portfolios quite substantially throughout spring. Despite mixed messages from the media about the future of property prices in the UK, this does not appear to have had much impact on landlords' decisions. By 2009 banks had virtually ceased lending, thus making it far more difficult for investors to find available buy-to-let mortgage finance. It is worth noting that between February and May 2009 the percentage of landlords selling properties rose from 4.7% to 5.6% and then in November to 7.6%. This supports opinion that many ‘amateur' Buy-To-Let landlords had, by now, had enough and were seeking to off-load their properties as their discounted mortgage deals came to an end. Conventional funding was limited and it was cash buyers that benefitted from the repossessions and BMV properties for sale.
UpMyStreet (2009) suggest that “if the mortgage situation stays the same [fewer approvals], cash buyers could become the only ones able to finance a property purchase. They can move in quickly which is an attractive trait for those wishing to sell quickly.”
Source: ARLA Survey of the Private Rented Sector: Fourth Quarter 2009, p.42
ARLA also provided relevant and valuable information on the topic of supply and demand in the private rented sector. “During the last three months there has been a further dramatic change in the balance of supply and demand in the rented residential property sector with the overall proportion of respondents saying that there are more tenants than properties available for them again rising sharply, this time from 24% to 41% and this change is reflected across the country (Survey of the Private Rented Sector, p.5). Whilst, this comment relates to the whole residential rented sector, not just the student sector, there is ample evidence from Savills, Knight Frank and King Sturge (UK Student Accommodation Market 2008).
to support the view that the private rented student market was similarly oversubscribed.
9 below further supports this by showing the 3 year average rental growth in the UK and quality of accommodation stock in the university sector respectively, within the institutional and private sectors. London saw phenomenal growth (16%) in the private sector from 2006 - 2009, whilst in the East of England institutional expansion (almost 7%) exceeded private growth almost threefold.
Source: Savills Student Housing Report (2009)
It is apparent that whilst supply can be somewhat manipulated by developers (although funding remains extremely limited) and private landlords, demand is very much student-driven. However, it could be argued that there is a direct relationship between demand and supply; if students are aware that accommodation is either expensive or in short supply, they may be inclined to apply to universities where it is known that accommodation is plentiful and cheaper, thus providing greater choice. In summary, landlords cannot create demand, they can only lessen it by increasing supply.
2.4.4 Purpose Built Student Accommodation and the Private Rented Sector
In order to determine the market share held by the purpose built student accommodation (PBSA) sector, the researcher has identified and highlighted Knight Frank as the most reliable source of information. Knight Frank is the leading independent global residential and commercial property consultancy. The literature used in this part of the study is the ‘Knight Frank Student Property Report 2010'. Knight Frank claim that there are four large providers of privately run PBSA currently dominating; UNITE, UPP, Opal and Liberty Living. However, statistics show that although levels of students taking up the option of private accommodation have increased, many students are still not able to find places. (Knight Frank Student Property Report 2010, p.2). The report also mentions that the majority of key university towns reported nearly 100% occupancy for the last academic year in both privately rented houses and private halls, with private halls targeting affluent domestic students, overseas students and mature students, the latter two of which are still growing in number.
Knight Frank include their own opinion in the report which can be seen as beneficial information to take into account for this study. The opinion offered relates to PBSA; however, the conclusion can be drawn that there is very large potential for private landlords to take advantage of the funding restraints that the large operators currently face.
The underlying market fundamentals are positive, with supply restricted and strong demand underpinning rental growth. Given the lack of finance currently available for development and the constrained pipeline, rents are likely to continue to rise for the foreseeable future. There is strong demand for high quality, income-producing assets and it is anticipated this will continue with increased appetite from investors for direct-let stock (Knight Frank Student Property Report 2010, p.3).
Also, in the report published in May 2009, ‘Spotlight on...Student Housing' was studied. Savills are ‘a leading global real estate service provider listed on the London Stock Exchange' (Savills). Research yet again proved the market to be highly lucrative for investors.
The average rents for Purpose-Built Student Housing (PBSH) grew by five per cent between 2007/2008 and 2008/2009, with growth of seven per cent seen in the capital. Demand for PBSH continued, despite the economic downturn, with undergraduate applications up by nine per cent for 2008/2009. Jacqui Daly (2009), director of Savills research, said: "High demand, low supply growth, rising rents and high occupancy rates make student accommodation an investment vehicle of choice during uncertain economic times, and suggest that the sector will remain relatively low risk for the foreseeable future (Spotlight on...Student Housing, p.2).
Despite great success for the market leaders in PBSA, when there continues to be high demand for accommodation and in some case 100% occupancy in an area, there should be potential for great success for professional private landlords of student houses too. Student opinions will prove crucial here to determine what is currently in favour when deciding what sort of accommodation to live in whilst studying at college or university.
2.5 Literature review: Summary of Findings
Strong marketing theories apply throughout the student property market, mainly with universities finding themselves having to compete for students as more and more polytechnic universities are reaching university status. A variety of different courses are becoming widely available. Landlords and private developers need to consider the decision-making process in order to affectively target their audiences and gain a competitive advantage.
Prominent academic authors have strong arguments for and against certain ways to determine markets. Although these relate to businesses and products, similarities have been spotted that could potentially influence a market requiring such high involvement, decision making and economically challenging. Further research of data needs to be achieved in order to put together any significant links that can relate this industry to those opinions considered by marketers.
According to the views and experience of successful property entrepreneurs, hotspots for student property investment are likely to be in locations where local property values are set to increase, where student housing demand is high and where occupancy rates are full or very high.
According to HEPI, growth in higher education participation is set to fade out at the end of this academic year. However, the BIS and the government seem hopeful that they can sustain the long run of increase in students continuing their education by setting goals to implement this. The government's goal of 50% of young people in education does not look likely to happen until the next decade now.
The BBC claim that 2010 will see yet a further decrease in property values, potentially up to 10-15% in depreciation. However, this information is conflicted by opinions of the CEBR in that house prices will reach record highs achieved in 2007 by the end of 2010.
Research from ARLA shows that in the early stages of 2009 rents were dropping nationwide but on a whole, those s increased throughout the year. Despite the increase in achievable rents, landlords continued to sell their properties due to the affects of the recession. Cash buyers saw this as a niche in the market and took it to their advantage as banks limited their lending options.
PBSA have a stable market share of student accommodation however, due to lack of financial availability, entry to the market is limited for new competition therefore making this a good time to invest in buy-to-let student accommodation if financially viable.
Chapter Three - Methodology
3.1 Philosophical Approach
The researcher has adopted a specific research philosophy by Saunders (2006, page 138) known as the ‘onion' (see 11 below). This model underpins the research strategy throughout the study and as Johnson and Clark (2006) argue, this has a significant impact not only on what we do but we understand what it is we are investigating. The below illustrates how the researcher must peel back layer after layer in order to get to the centre, the data collected and analysis section.
3.2 Theory behind the respective chosen methods
The methodology provides clarity as to how the researcher will go about achieving the aim set out in Chapter One, the introduction. A combination of methods has been used due to the bilateral foundations of the research question.
The beginning of the study is to explore the industry and try to discover any distinctive correlations to strong marketing theories or models from prominent authors. Therefore a series of models will be tested against the market and the appropriate models will be involved when making conclusions for the purpose of the study. The primary data will be valuable in order to construct conclusions based on any link between marketing strategies, theories and models.
The rest of the study requires both quantitative and qualitative research in order to ascertain a clear understanding of the realistic circumstances of the industry, and the behaviour of those involved. However other research methods are applicable in order to directly conclude all the objectives set out. The majority of Chapter Two refers to governmental legislation such as official documentation and national statistics therefore secondary data was essential to prove hard fact over opinion.
Quantitative research will be essential to pursue the research in order to obtain accurate results numerically, allowing the researcher the ability to make forecasts for the future. Murray Thomas (2003, page 2) makes sense of this by claiming “quantitative research uses numbers and statistical methods, quantitative researchers seek explanations and predictions that will generalize to other persons and places”.
The topic of the study is very much based on buyer behaviour and consumer preference. Due to this, qualitative research is vital to identify any trends in consumer behaviour, attitudes and opinions and experience gained from knowledgeable parties.
Merriam (1998, page 2) defines qualitative research as:
“An enquiry that focuses on meaning in context. It requires data collection instruments that are sensitive to underlying meaning during data collection and analysis”.
Wimmer and Dominick (2006, page 116) suggest qualitative research “uses a flexible questioning approach. Although a basic set of questions is designed to start the project, the researcher can change the questions or ask follow-up questions at any time”.
The qualitative data methods that were chosen for use in the study are:
* Interviews (Mason, 2002, page 45)
* Focus groups (Morgan, 1987, page 3)
The quantitative data method that was chosen for use in the study is:
* Questionnaires (Saunders et al.2000, page 362)
Questionnaires are a preferred method as they are the most cost and time effective. According to Saunders et al (2000) questionnaires are used to gain insight into the nature of the thoughts and feelings of the participants. However, a significant disadvantage to this method of research is accuracy. It is not possible to guarantee that the questions have been answered honestly, thoughtfully and unbiased.
Qualitative interviews will also be used to provide clarity from the questionnaires by selecting an experienced representative from each party; letting agents, tenants and buy-to-let investors. Mason (2002) feels that “qualitative interviewing is, in fact, one of the most - possibly the most - widely used methods in qualitative research, and for some very good reasons. It is considered by many to be an appropriate and practicable way to get at some of what qualitative research provides best - valuable data”. Although interviews are very accurate and specific, they do require a lot of time invested into them. The interviewee is very important and therefore the questions set to be asked must be researched in order to extract the maximum output from the interview.
A focus group is an alternative route to collect information however, this method is time consuming and due to the depth provided from the questionnaires and interviews, the focus group could prove to have little or no positive outcome. Morgan (1997) encourages the use of focus groups and defines a focus group as:
“The hallmark of a focus group is their explicit use of group interaction to produce data and insights that would be less accessible without the interaction found in a group.”
The researcher does expect a focus group to feature in the research but despite the great interaction sparked in focus groups, if the core research is found through the use of interviews and questionnaires then the group will not be required.
Black (1999, page 216) suggests that conducting qualitative research on attitudes successfully is not easy and achieving interaction from the target audience is essential. “Collecting valid and reliable data on attitudes, opinions and beliefs is not trivial and requires careful planning. The problem is still there: it is necessary to get subjects to respond or take action then we can infer what they are thinking”. Despite Black's negative approach to qualitative research, the researcher agrees with Wimmer and Dominick in that qualitative research is so useful because of its flexibility.
3.3 Methodology in Correlation with Objectives
As mentioned earlier in 3.1, a combination of methods have been implemented by the researcher in order to achieve results in research. This comes as a result of the fluctuant market and diverse overall topic. It is important that the method chosen is best suited to its objective. However, the diversity and the variety of methods used can only improve the study, broadening views and enabling the researcher to dig deeper.
3.3.1 Objective One: The use of marketing in the student property industry - a look at profitability and competitive advantages
Using the ‘Marketing Mix', the ‘Theory of Competitive Advantage' and ‘The Five Forces that Shape Industry Competition', the market strength and profitability will be researched to determine theoretically whether it makes sense to invest in this current climate.
The Porter (1998, page 4) model of competitive industry structure will be used in research in order to assess the profitability and determine the threat of competition. The bargaining power of buyers and whether it is possible to create a competitive advantage will also be looked at. This method was chosen because the researcher is interested to know whether marketing theories and concepts apply in such a fast changing market, subject to economical implications and risk. This research co-sides with the primary data collection and is essential in order to make any statements when comparing.
3.3.2 Objective Two - Determining a Property Hotspot
From the knowledge gained from literature from industry professionals it is clear how to determine a property hotspot. The research here will be quantitative as annual rental s and property values must be discovered.
Although the research provided from chapter two is credible, additional research will undergo to determine a realistic hotspot for an investor ready to invest into the market. It is important for any investor to have a rough idea of what sort of financial outlay is required in order to purchase a property in today's climate. The study will look at total cost for an investor in today's market, assuming an 85% loan to value mortgage is achievable, and renovations costs of £20,000 are applied.
Previous mentioned in chapter 2.2 we looked at how industry professionals went about gathering information when determining a property hotspot.
Ahuja followed two simple principles when determining UK hotspots for investment; annual rental yields and predicted property prices. The author suggests that when investing you must collate data, as recent as possible, of the actual yearly incomes of a location and divide that by the actual property price of that location.
His data was taken from accurate sources such as local letting agents and the Land Registry respectively. Ahuja admits that he ‘instantly eliminates locations if tenant demand was low, even if the areas are high yielding.'
Initially, 55 of the most prominent university cities/towns are to be researched. The average house price and rent for a 4 bedroom residential property is to then be determined. It is important for an investor to know what rate of return on investment to expect on a yearly basis. Prior to the recession, a fantastic return on a student property investment per annum was 8% (O'Toole, C. 2008). Therefore it can be determined what rental income needs to be achieved per week in proportion to the investor outlay in order to achieve an 8% yield in today's market. The UK's number one property website, Rightmove, will be used to for statistical s for each area such as average property values and rental income. Accommodation for Students, the world's number one search engine for student property (Accommodation for Students, 2010), will also be used as an accurate tool for determining rental income nationwide. The site was designed by students and is a very strong source for determining realistic s for rent that students are currently willing to pay in an area.
3.3.3 Objective Three: Growth in Higher Education Participation
Research carried out in the literature review will provide key information here when analysing the contrast in past and present trends. The detailed information dates back to 2006 and labels this year as the most successful year-to-date for higher education participation as numbers have since been soaring in comparison. This is a factor contributing to the decision to carry out this study originally, therefore making this objective fascinating considering the demand for further education in this volatile economy. The official source of current higher educational statistics for participation is UCAS. According to the UCAS website, they are the organisation responsible for managing applications to higher education courses in the UK. However, there is no factual evidence currently available for the future after the next academic year, and there never will be. Deferrals can be taken into consideration but this will only be a small proportion compared to annual applications for full-time undergraduate courses. Therefore rather than predicting the likely growth in higher education, all that can be researched is factors that could prevent growth in the future in order to get some understanding of the aims of the government set out in chapter 2.
3.3.4 Objective Four: The market in the last 18 months?
Based on the research in chapter two, this section of the study can be segmented into four individual research areas;
* Effects of the recession on the student property market
* Supply and Demand
With any investment there is a chance to gain great returns, but also a chance of the investment heavily depleting. The researcher must carry out sufficient due-diligence to discover any potential opportunities in the market and likewise, any threats. Primary data will be analysed here to provide depth into the current trends such as supply and demand and competitors. However, values of properties and achievable rents will have already been determined by the research into property hotspots. To gain an overall perspective of the market, a SWOT analysis will be used to determine potential strengths, weaknesses, opportunities and threats. A SWOT analysis is ‘a structured approach to evaluating the strategic position of a business by identifying its strengths, weaknesses, opportunities and threats. The strengths and weaknesses represent the internal factors of the business/product. The threats and weaknesses are anticipated events or trends that have implications for performance (Jobber, 2004). The strategy can be related to the nature of this study; student property as the business/product.
3.3.5 Objective Five - Students' opinions as tenants - questionnaire
The objective here was to obtain a general consensus of current student accommodation standards and demand. As this was opinion based a questionnaire best fit the situation. The opinions can be analysed easily and charts can be plotted as a result of the information.
It is important that the target audience for the audit are students and/or past students that have lived away from home in order to study. With this in mind, the online survey was sent out via the university campus intranet and in addition, handed out to peers on campus. Both versions were completely identical, the researcher felt in order to optimise capturing the appropriate sample, online marketing was necessary. The use of probability sampling is required as it is impracticable to survey the entire student population. Henry (1990, page 15) argues that using sampling makes possible a higher overall accuracy than a census. A sample of 100 is deemed to be an appropriate of respondents for the questionnaire.
3.3.6 Objective Six - Students as tenants; an agents opinion - Structured Interview
A questionnaire was an appropriate method of research to collect data from letting agents however, the researcher feared that the results would be somewhat similar. Therefore a structured interview was the chosen method of research here. Interviewing each individual agent would be far too time consuming and also it is highly unlikely that it would be feasible due to agent commitments and cost restraints. One local letting agent in the area was interviewed, however, they requested to remain anonymous due to the nature of some of the data could be of particular value to competitors. This research is beneficial in order to gain opinion from the industry specialists as it enables the researcher to gain depth in the state of the current market, identify any current negative aspects that investors should be aware of and gain accurate data about the current achievable rents from student properties.
On this occasion, it is not deemed important to expand the research out of the respective location, Lincoln. As the city is heavily student populated and has been for some time, the agents are likely to be experienced with student lets and have some good arguments for and against the tenants in question. Although this extent of research is adequate, further research beyond Lincoln would have been hampered by time and financial constraints.
3.3.7 Objective Seven - Experienced industry professional in investing, managing and letting - Interview
The researcher felt it was vital to hold a structured-interview with an industry professional with hands on experience in all aspects of investing in buy-to-let student property. A structured interview was chosen in agreement to Kumar's (2005, page 126) argument that a structured interview provides uniform information, which assures the comparability of data. There were specific questions that would provide the researcher with clarity and therefore be comparative or contrasting with those opinions of agents and tenants. The interviewee is of an unbiased attitude as the questions asked in the interview relate to personal experiences and relationships with clients and tenants. The selected interviewee Mark Black, is the CEO of a leading student property investment company, Castle & Gatehouse. The company specialise in buying discounted properties, renovating them to a market leading standard and multi-letting them on a room by room basis through the use of HMO's. The company has over 60 years of experience and for that reason have been selected by the researcher as a quality source for the purpose of this study.
Chapter Four - Data Collection and Analysis
4.1 Objective One - The use of marketing in the student property industry
Jefkins (2000, page 7) describes at least 12 elements of the marketing mix such as naming and branding, packaging, sales promotions, distribution, public relations and after-sale service. The most commonly cited elements of today's marketing mix are, however, product, price, place and promotion - the 4 P's. If conducted correctly, a competitive advantage can be gained; thus increasing performance over competitors. In theory, this method of investment follows the same fundamental process as a product on a shelf in a shop.
Doyle and Stern (2006, Page vii.) argue that the success of the enterprise is sustainable only if it can organise itself to meet the current and prospective needs of customers more effectively than its competition. In this case the investor (or developer) would be the enterprise and, therefore, must offer what the customer or tenant will find of high value; the product being the property. The product concept in relation to the property would include aspects such as quality and features, amenities and lifestyle benefits such as entertainment and sports facilities or simply a security system.
Although many student property investments may be a one off, or on a very small scale as an alternative source of income, investors doing it on a larger scale must thing about creating a brand to increase awareness, trust and consumer perceptions. For example, if an investor is to purchase 10 residential properties in one university/town city, making them similar in terms of renovation or spec will increase brand perception. Jobber (2004, page 44) suggests that if consumer perceptions are positive, this will always make it harder for new brands (landlords) to compete. 1 (below) reinforces Jobber's theory that core benefits derive from the core product.
The price would represent both the amount of money the investor would have to spend to buy the property and the price which the tenant must pay in order to live in the property (the product). With price playing a fundamental role in any investment, this may be seen as the pivotal force in the mix. The price of the property will largely determine the returns for the investor and the affordability for the tenant. Without an affordable price, neither the investor nor the tenant is likely to pursue the other 3 steps of the marketing mix.
“If profit is the crop of a business, price is the fertilizer. Correct fertilizing will determine a good crop.”
Mar Iman (2006, pp. 245 and 303) argues this in a rather logical theory, suggesting the correct pricing will determine good profit. He also suggests that correct pricing can increase demand for property; therefore, if rental expectations are too high, students will find accommodation elsewhere. This also applies for PBSA companies, where the student will reduce the demand for quality in order to achieve a lower price.
Place is an element of positioning that signifies the availability of the product to the consumer (Mar Iman, 2006). Although place is slightly different in as much as the property is not going to be distributed, it is merely a case of having available properties in the areas that are in demand. Certain towns or cities will have areas that students prefer to live in. Research must be undertaken in order to identify those factors which affect a student's choice to live in a certain area. However, place could also be seen as the location of information that the consumer needs in order to enquire about a specific property. Kotler (2008, page 47) argues this case by claiming ‘what is being “distributed” is not the physical product itself, rather, the information regarding the product'. In this case it would be the responsibility of the landlord or agent to distribute the necessary information in order to attract attention from the target audience. For example, student tenants would expect to find details about available student properties perhaps in their student union, library or student services office or on independent websites offering student digs.
The definition of place has also been much argued, with authors now suggesting that ‘a product's positioning is the way that the product is defined by the consumer on important attributes - the place the product occupies in consumers' minds relative to competing products' (Kotler et al. 2008). If this is the case then in the context of this study this would relate back to the core product and brand potential covered in the ‘product' section.
The promotional mix in terms of student property investment is significantly business-to-business. For example, home owners trying to sell their properties will rely on estate agents to promote their property to the consumer, and landlords will rely heavily on letting agents. It is then the responsibility of the agents to use the correct choice of promotional tools in order to inform and promote the deal to the general public. The major 4 elements of a successful promotions mix are advertising, personal selling, public relations and sales promotions.
“The concept of integrated marketing communications suggests that it must blend the promotion tools carefully into a coordinated promotional mix” (Kotler et al. 2008)
However, the property market is a high-involvement decision-making process, developed from the AIDA concept (Strong and Elmo St Lewis, 1925, page 43). This concept can be seen in 2 (below). In order to provoke attention in a property, whether it is for sale or for let, the owner must use a promotional tool such as advertising to get it in front of the consumer. In this case the appropriate promotional tool is advertising done by the agent. Interest is then gained by the personal selling skills of the agent, desire is created by the emotional attachment of the buyer/tenant which consequently leads to the action wished for by the owner or selling agent.
The AIDA concept (see above 14) also applies to universities and higher education institutes. As Levy said in chapter 2.1, for this particular topic, it wasn't until recently that stakeholders realised that they had to use marketing rather than selling. Although the AIDA concept is a theory of advertising, it has become essential as part of the communicative strategy for universities.
The above relates to the marketing strategies of universities. In the centre is the rivalry among existing universities. As literature proved, it was only recently that this had to be considered as there were only a limited number of universities and therefore reputation and quality overruled the smaller institutions. Today however with the increasing student growth, there is much more rivalry. As we can see in 15, existing institutions must think about:
* The threat of new institutions entering the market and the services they are offering.
* Bargaining power of the prospective students. Students have the freedom to accept the same course at a competitor university.
* Competitors offering the same courses as the existing universities. This will increase quality as competition and supply is increased.
* Bargaining power of the government funding. The government feeds the higher education system with investment every year. This can give some institutions an unfair advantage.
However, as Levy said in chapter 2.1, the universities are only competing if the quality of student reflects their reputation as an institution.
4.2 Objective Two - Determining a property hotspot: a look at the UK's top locations for a potential investor - See Appendix 1
The 55 most prominent university locations were researched (see appendices) and the following statistical attributes were looked at:
* Property Value
* Landlord deposit needed to purchase
* Typical renovations cost needed to exceed competition living standards
* Average weekly rent
* Average annual rent
With these s it was then feasible to determine the rent required each week in order to achieve an 8% yearly return on investment. The average property values and weekly rents were comparative of those in the area of the same class e.g. terraced properties local to university or college. The s were achieved using a mean average. This was then multiplied by 52 and divided by 12 to give an average rent per month, and therefore multiplied by 12 once more to calculate the annual rental s. 16 illustrates this.
18, below, is a table of the 5 most promising areas for investment in student property in the UK. Not only are average property values very low but average weekly rents are considerably high in proportion. As mentioned earlier in the methodology, prior to the recession, an annual yield of 8% was achievable, the s below help us decide if an 8% yield is still achievable in today's volatile market. The total cost for an investor has been included to give an idea of what sort of investment is necessary in order to gain a fantastic yield in return. Renovations have been seen as essential as the quality of PBSA is very high and a student landlord must equal or exceed the standards in order to compete. The towns below are today's best areas for student property investment. As you can see, in order to achieve a yield that was seen as fantastic prior to the recession, today you would only need to raise the rent by up to £3 per week in Hull, Norwich and York. However, the average rent per week in Middlesbrough and Lincoln is considerably low. The property value mirrors this therefore if renovation work can improve the quality of the property to equal or exceed PBSA in the areas, the rental increase of between £11-14 may be justifiable. The of £20,000 for renovations cost was taken from the structured interview with Mark Black, an industry professional. This is the needed to invest into renovations and refurbishments that puts the standard of the property above local competition and certainly equalling that of PBSA (see objective 7).
Property Value (£)
Renov. Costs (£)
Total cost (£)
Av. Weekly rent (£)
Rent needed p/w for 8% Yield (£)
Findings taken from Rightmove and Accommodation for Students (2010)
4.3 Objective Three - Growth in Higher Education Participation
Growth in higher education participation has increased dramatically since 2004. UCAS (2010) say that the number of people applying since 2004 has increased by 153,832 applicants. In 2004, the number of applicants was 486,028 and last year's applicants for this academic year at 639,860. The number of successful applicants increase also, 377,544 were accepted in 2004 and 2009's s showing 481,854 .
20 shows the views of Bailey and Bekhradnia (2008) in their publication ‘Demand for Education to 2029'. With no prove of increase or decrease to go on, it is only possible to highlight the most recent topics that could prove to be an obstacle for higher education and therefore lead to the alleged decrease until next decade. However, there is evidence yet that there could still be an increase for the next academic year. On 8th February 2010, UCAS released the English applicant s for the next academic year, 2010-11. They stated that ‘the number of English students applying to full-time undergraduate courses at English universities and colleges has increased by 22.2% compared to the same point last year' (Office for Fair Access, 2010).
Despite the positive aims set out by the government mentioned in chapter 2.3.2, ‘The Independent Review of Higher Education Funding and Student Finance' a paper reviewed by the Times Higher Education (2010), summarises some of the key issues facing the potential threat of a decrease in higher education participation.
The key points from the publication being led by Lord Browne of Madingley are:
* The introduction of top-up fees has not led to a fall in full-time participation
* There is clear evidence that bursaries are not understood by students early enough to have a substantial impact on their choices
* A consensus that potential students need better information, advice and guidance, including information on the teaching experience they can expect on different course
* There has been progress over the past five years in widening participation to higher education, but that this has been less marked at the most selective universities
4.4 Objective Four - The market in the last 18 months
Property Market as a Whole
As seen earlier in 2.4.1 of the study, statistics from Nationwide in November 2008 showed that the average price of a UK property was £158,872, almost £30,000 less that in November 2007. A year later the BBC claimed that house prices were actually rising each month from Spring 2009 until December. It was argued by Davis (2009) that the increase would be short-lived and the slump would continue once again into 2010. The CEBR agreed with Davis by stating that values would decline until the end of 2009 and at some point in 2010 they will reach previously peaked levels. As of March 16th 2010, the average house price is £224,064, an annual decrease of 2.8% and a quarterly increase of 2.2%. The average cost of a terraced house is £177,633 (BBC, 2010). This is particularly important as the majority of student buy-to-let properties tend to be terraced houses. This is a decrease of £8,683 from November 2007 and an increase of £40,927 from November 2008 (Halifax Historical House Price Data, 2010).
The trend since 2007
A publication produced by Nationwide in January 2010 ‘The Economic and Market Review January 2010' has released s dampening the mood for landlords despite the bright future ahead for property values. ARLA's 2009 fourth quarter research shows a slight decrease in rental returns by 0.1% and stating that achievable rents have fallen during the year. However, their research shows that supply and demand has turned around, with the majority of respondents saying that there are more tenants than properties; an increase from 24% to 41%. ARLA also mentioned that the void period rate is now 27 days rather than 28. This can only be encouraging for investors in 2010 as in general in 2009 landlords saw a 7.6% annual return on their investment and a 3% increase in the value of their property (The Economic and Market Review January 2010).
The model has been used to evaluate the strategic position of an investor in today's climate given the variables affecting the market.
The Media's View on Demand for Student Property
Cooper (2009) of the ‘Investor's Chronicle' argues that “The recession and rising unemployment have caused more sixth formers to seek higher qualifications and even more adults are wishing to retrain. This trend is a repeat of the last economic downturn. All the indications are that accommodation supply will continue to fail to meet the rising demand”.
Bourke (2006) of ‘Citywire' suggests that many towns in the UK struggle to cope with demand for student property because the effect of the students during term time can increase the population of the town/city by up to 70%.
“According to research from John Socha, National Landlords Association, 70% of the residents of Bangor are students and 90% of students live in rented accommodation while studying at university. The same applies to St Andrews where student numbers increase the population by 50% during term time. It also places pressure on accommodation in the town, as the students all have to live somewhere. Most universities try to accommodate freshers in halls of residence, who then need to find themselves a rented home for second and subsequent years”.
This research suggests that landlords in these areas are thriving year after year due to the replenished demand in the area. Students come and go annually however the demand stays put. Markets such as these can easily become saturated when the demand is cut by an overwhelming supply. Therefore, the success of a university in proportion to the area that it is in, can determine demand from students.
4.5 Objective Five - Student opinion questionnaire - See Appendix 2
The following information is data collected from the questionnaires sent out to a sample of 115 people, 100 of which are or have been students. Therefore the following data could only be taken from the sample of 100 respondents. The questionnaire's aim was to find out opinions on student accommodation from a tenants point of view. The age of the respondents were typical of the target market, undergraduates, and they ranged from 18-23+.
Following the last question, the questionnaire featured a question on factors that influenced the student's decision to choose their respective accommodation arrangement. The question format was that of a comment area therefore 100 individual responses were collected.
The proportion of students that thought their rental outgoings were acceptable for their accommodation was split by accommodation type. Students in housing were less satisfied with the amount they were paying than students in PBSA. Despite 26 showing that students were actually paying significantly less in student housing; only 69.4% of students said that they thought this was acceptable for housing. Could this be that the quality of the student housing in the sample area does not justify the rent? Perhaps this relates back to the argument by Collins (2010) in chapter 2.2 about renovating properties to market leading standards. This is an area that could be further researched; the quality of student properties in Lincoln. Perhaps if Mark Black's ‘Castle & Gatehouse' were to operate in the Lincoln area, would we see a monopoly in student property? It seems that students in the area like living in student housing but the cost does not justify the quality.
4.6 Objective Six - Letting agents' opinion questionnaire - See Appendix 3
The majority of the results from the interview were how the researcher had anticipated in the hypothesis. The agent claimed that landlords struggled finding tenants in late 2008. This was obviously the start of the UK recession. The agent mentioned that this trend had turned around by 2010 and more would-be landlords were visiting asking for information as they were interested in investing in student property. 9 in chapter 2.4.3 shows how the rental market picked back up again in 2009.
The agent claimed that during 2009, supply overtook demand and rent levels decreased as tenants were able to drive their landlords down. However the agent was quick to jump to the fact that now, in 2010, supply does not exceed demand and rents have risen quite substantially.
The next part of the interview was not fully anticipated by the researcher in the hypothesis. The agent claims that they have no problems with letting to student what-so-ever. “They tend to be good payers as often the parents pay the rent directly to us as the managing agents”. The agent went on to say that they have experienced some awful family tenants that have caused damaged and even been raided by the police for drug charges. “I would not say that students are any worse than families on balance”.
The agent declared no knowledge of any superior quality student properties in the area. They also claimed that landlords only renovate when they have to and are under the opinion that students don't look after properties, therefore shouldn't have their properties invested in too heavily.
Financially, the agent would rather let to students because of higher profits. They are let by the room rather than by the property as a whole. As the letting agent works on a 10% management fee, the students are far more profitable as student rents can bring in as much as £1200 whereas a family let would bring in £500-600. As far as maintenance is concerned, the agent conceded that any property requires maintenance, regardless of who lives in it.
This is great news for an investor. The information gained here proves that investment in student property can have its ups and downs but it is still largely profitable throughout a recession. Yes, supply did at one stage exceed supply but as long as the property is of market leading quality, there should not be any poor occupancy rates. However it is now evident that many landlords are not renovating to a high standard at that the theory of Collins (2010) about renovating the property in order to maximize rental yields and also the business model of Castle and Gatehouse is now significantly credible.
4.7 Objective Seven - Industry professionals' opinion interview - See Appendix 4
The results from the interview with the industry professional were refreshing. Mr Black claimed that his Buy-To-Let business model is recession-proof and will actually work in all market conditions. He suggests that an investor should not get attached to a property emotionally as this can encourage ignorance of the key point; whether it will work as an investment. However, he concedes that there are probably more areas in the UK where the business model won't work than will, and therefore simply do not source in these areas.
Black suggests that the renovation of the property is pivotal in the process. When buying properties below market-value, a strong renovation will give an immediate uplift in the value of the property, the property is then re-valued as a commercial asset because it is no longer a privately owned terraced house. It is in fact an investment product producing a return of 8-12%.
Black claims that because of the sheer quality of their student properties, they can receive occupancy rates of up to 99%+ and that demand is unchanged because of their competitive advantage.
Black argues that PBSA is not in direct competition with his business. “We are simply not in the same market place. Sharing with 2 or 3 friends (often met whilst in the first year on-campus accommodation) has proven to be more preferable than remaining in purpose-built blocks”.
Finally, Black does not see a potential slump in higher education participation as a threat to his business. For as long as C&G provide top quality properties for students, Black says that student will always pick quality and cleanliness over poorer conditions.
Chapter Five - Conclusions and Recommendations
Having completed the results, the hypotheses at the start of the study will now be compared to the results.
1. Hypotheses 1.
Marketing will be essential in this industry, however only within limited areas. Depending on how a property enters the market in the first place, it must be marketed correctly in order to reach the target audience; the buyer or the tenant. The university will need a marketing strategy in order to reach potential students and the competition in the market will need a marketing communications strategy in order to find out consumer needs and attract them.
Results show that this is the case and that marketing concepts from the ‘marketing mix' are essential to a landlord or PBSA owner as they must offer what the customer or tenant will find of high value. Porter's ‘Five Forces' clearly prove that universities can't rely on the students simply going to them. They must use this marketing model to carefully identify:
* The threat of new institutions entering the market and the services they are offering
* Bargaining power of the prospective students. Students have the freedom to accept the same course at a competitor university.
* Competitors offering the same courses as the existing universities. This will increase quality as competition and supply is increased.
* Bargaining power of the government funding. The government feeds the higher education system with investment every year. This can give some institutions an unfair advantage.
2. Hypotheses 2.
UK hotspots for residential property investment will tend to be judged by the rental yields that can be achieved in that area. This may be due to a university in the area or a reputable higher education institute. Property values will be irrelevant as the investor in more interested in the rental yield.
Rather than judging a property by its potential capital growth, it was clear after reviewing literature that a ‘property hotspot' should be determined by its value and its average weekly rent. It can then be determined what yield it is likely to produce. This is assuming that the property undergoes £20,000 worth of renovations to compete with the quality of PBSA. Based on a 8% yield that was found to be fantastic prior to the recession, the ‘property hotspots' of today are Hull, Middlesbrough, Lincoln, Norwich and Hull, with an 8% yield possible if the average rent was increased by only a few pounds in some places and £14 in Middlesbrough.
3. Hypotheses 3.
Higher education participation has grown and will continue to grow but at a steadier pace due to concerns over tuition fees and slower economic growth in years to come.
Higher education participation has grown dramatically over recent years. 153,832 more applicants applied last year than in 2004. The number of accepted applicants has also risen since then by over 100,000 students. Growth in the future was not actually possible to calculate however UCAS did admit that there was an increase of 22.2% in English applicants for the next academic year compared to the same point last year.
4. Hypotheses 4.
Economic factors will be uncovered that will put a negative aspect on investing in the market, however, depending on individual financial circumstances, these same factors could make the market all the more attractive to some.
5. Hypotheses 5.
Students will prefer the privacy and comfort of their own house, especially following their introductory year of university. First year students will be persuaded into purpose built accommodation (PBSA). Price and proximity will prove to be important factors that influence choice.
Over 52% of students preferred living in student housing rather than at home or in PBSA. The most influential factors were cost, proximity to university and friends, and the ability to have parties/BBQ's in their own space. Research shows that students in student housing paid significantly less than those in PBSA, yet they still thought the price was unreasonable for what they got in return. This imposes an opportunity for landlords to increase quality and likewise, the rent.
6. Hypotheses 6.
The lettings agent will encourage this form of letting because of convenient and lucrative contracts, committing students for the majority of the year, if not all of it. They will prioritise students who wish to rent on a per room basis because this produces higher returns for the landlord and, therefore, better commission for the managing agent. They will, however, take into consideration synonymous with students is higher maintenance and upheaval. Student behaviour will be raised as a negative aspect.
The results from the interview with the letting agent were very similar with that of the hypotheses however the agent denied student behaviour as a negative aspect. The agent argued that families can be and have been much worse. More people are interested now in becoming a student property landlord as the effects of the recession look to be over on the market. According to the agent, demand exceeds supply in the area and students are far more profitable to letting agents than other tenants due to the room by room rental basis. The results highlighted a re-occurring point throughout the study - there is room for improvement in the market. Student houses can dominate the market if substantial investment is made into the quality of them.
7. Hypotheses 7.
Investment companies and selling agents will hail the state of the market, claiming that now is as good a time as ever to invest. Student property management companies will assert that student tenancies are no more difficult than ordinary BTL tenancies and that returns are consistently higher, both prior to and during recession.
The results of the interview with Mark Black of Castle & Gatehouse demonstrated one key issue throughout, value. If the property is invested in, it will create added value, a strong yield. At this point it can be re-valued as a commercial asset rather than just a property. This adds a whole new aspect to the study, an exit strategy. If an investment is achieving a yield of over 8% year in, year out, it can be sold on to an investor at a much higher price than the purchase price. For example if it is achieving 12% yields it can be sold by the investor for a higher price because people will be interested in it even if it returns a yield of 9%. The interview proved that quality among poor properties will increase demand and achieve almost full occupancy rates. The underlying aspect here is that students prefer a house to live in but unless quality is improved the demand is in PBSA. However, because of the C&G business model, they are not in direct competition with PBSA because the quality exceeds that of the PBSA.
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