Apr 08

PBSA versus HMO – what’s the best route into the student buy to let market?

Mark Robinson, managing director of Fraser Morgan, explains how PBSA and HMO stack up against one another in the student buy to let market and evaluates the options for investors.

Demand for student accommodation is surging as more and more young people take up university places year-on-year, while increasing numbers of international students are coming to the UK.

This is good news for anyone thinking about investing in student buy to let property. However, to ensure a profitable investment, you should carefully consider the type of student accommodation to invest in, and what is likely to deliver the best returns.

New regulatory issues for HMOs

The first question many investors face is whether to opt for purpose-built student accommodation (PBSA) or houses of multiple occupation (HMOs).

It’s possible to get decent returns from both, although it’s important to keep in mind that a key regulatory change in the HMO sector is due to be implemented. This will mean landlords need a licence for property that accommodates five or more people in two or more separate households, regardless of the number of storeys.

The change is expected to affect in the region of 180,000 additional HMOs in England and Wales, and property experts believe it will dissuade many investors from entering the increasingly complex HMOs sector.

What you should know about PBSA

As a result, the PBSA market is poised for an upturn as more investors see it as their best option. However, if you do want to go down the PBSA route, you should think about whether to invest in a property containing cluster flats or studio apartments.

In some circumstances a mixture of the two is viable, although investors are advised to partner with a PBSA provider that will determine an optimum mix, taking into account the specific locations they are operating in.

The ins and outs of the HMO market

A particular issue with HMO property is that it frequently needs costly conversion or refurbishment work before you are in a position to let it.

Furthermore, the government is not only bringing in tougher regulations, but also ramping up tax for the purchase of residential BTL property – largely in response to the UK housing shortage. The upshot is that residential BTL investments are significantly more challenging, especially for new investors.

You should also take into account that student buy-to-let properties require hands-on maintenance. This means landlords have a choice. They can foot the bill of outsourcing to a property management company, or be prepared to fix problems themselves – at any time of day or night.

On top of this, there is the task of finding appropriate student tenants – and, of course, collecting their rent when it falls due.

The advantages of PBSA

Figures from property consultancy Knight Frank suggest that PBSA has been the UK’s highest yielding property sector since 2011. Current annual yields are eight to ten per cent.

Another key advantage is that unlike HMO properties, PBSA is classified as commercial property which makes it exempt from stamp duty in transactions worth £150,000 or less.

Just as importantly, some 74 percent of students cannot find accommodation in a dedicated student block, so the long-term demand for PBSA is highly sustainable.

Fraser Morgan specialises in the development of quality student buy to let projects aimed at investors. We are able to offer these developments on either a land only basis, or as a turnkey investment. For more information, contact Mark Robinson.

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