Can student accommodation be a good investment?

Purpose-built student accommodation units are sometimes popular choices for investment properties. Statistics show education is Australia’s fourth-largest export commodity, while international student numbers are growing at around 5% per annum.

According to Jones Lang LaSalle’s director of student accommodation services Conal Newland, Australia is facing a shortage of purpose-built student accommodation blocks. Compared to popular study destinations such as the United Kingdom and the United States, Australia falls behind in supplying such accommodation for students.

However, we recently reported a sale of a one-bedroom unit in Melbourne located in a student accommodation building that sold at a $77,000 loss, but reflects a 10.76% gross yield.

This raises a few questions. What are the borrowing practices for a student accommodation unit? Are student accommodation units good investments? 

Mortgage broker Mortgage Choice spokesperson Jessica Darnborough told Property Observer that most lenders will put restrictions on borrowing for purpose-built student accommodation as they have a “unique resale value”.

“Some (lenders) will lend only up to 80% and some will go lower, some will put it at 0%. The person will need to pay outright or borrow against what they own. The lender will look at whether or not, if the loan goes bad, how easily they can sell the property,” she said.

She notes that student accommodation units are not easy to resell, as they have a very specific target demographic.

For property investors looking to purchase purpose-built student accommodation, she recommends doing your due diligence as lending restrictions often change with market conditions.

“Have all the collateral that you would normally have for an investment property. Have your tax returns on file, ready to go. Make it as easy for them as possible – make sure you have everything you think they need,” she said.

If you are unsure, Darnborough recommends seeing a mortgage broker, who will be able to advise you on which lenders are lending, and which lenders have the biggest loan to valuation ratio (LVR).

Newland shed some light from a developer’s point of view. He asserts that there is a shortage of “quality, purpose-built accommodation out there”. There is an undersupply from universities, and most private sector accommodation for students are conversions from old residential properties.

As a result, developers are coming into the Australian market, building quality student accommodation with professional management.

“They build the accommodation, hold onto the investment, and operate it for the long-term,” Newland said.

He notes that Australia has a “favourable” yield profile. Jones Lang LaSalle was involved in the sale of RMIT Village, which Newland says will net a yield of “between 2.75-8%”.

“Compare that to the traditional aspect, in the residential sector, those returns are pretty good,” he said.

“Melbourne is facing such a chronic undersupply of purpose built accommodation. There’s so much potential growth in terms of developing accommodation. If developers build quality accommodation in the right place and not overpricing, based on supply and demand, that accommodation should sell itself in today’s marketplace,” he added.

This article first appeared on Property Observer.