Is student accommodation a worthwhile investment?

September 18, 2015

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If you’ve been thinking about investing in property, purchasing a student unit may have crossed your mind. However, there are a few differences between regular residential investments and student accommodation that are worth considering before taking the plunge.

Student accommodation is often popular because it allows you to purchase a unit in a capital city on a low budget. Yet there are alternative investment options such as urban shares, suburban properties, or even parking spaces. Is a student accommodation really the best option from an investment standpoint?

The Rush to Build

The past decade has seen a boom in the number of overseas students enrolling in Australian universities and technical colleges. This has led to a need for purpose-built student accommodation, which is relatively cheap to build due to the small size of each unit. Typical starting prices for student units are $150,000 to $300,000; which has made student accommodation an access point to get a foot on the urban property ladder. That low price and high demand has made student accommodation attractive to investors.

Examining Capital Growth

One of the primary concerns with purchasing student accommodation is that it possesses a more limited scope for capital growth than other types of residential investments. Unlike typical properties, there’s a lack of owner occupier appeal with student accommodation. This limits the type of buyers who would be interested in it, and restricts capital growth. The appeal of student accommodation is that it can lead to high rental yields even at the cost of capital growth, averaging between 6 and 8 percent. However, if overseas student enrolment starts to drop over the next few years, demand will decline dramatically as will both rental yields and capital growth.

Difficulty for Sellers

The lack of owner occupier appeal that restricts capital growth can also make student accommodation difficult to sell. There will be a more limited range of buyers interested in this type of property, which could lead to a longer time spent languishing on the market. Another issue that can arise is the fact that student units are often smaller in size than a bank’s lending threshold. This threshold is generally 50 square metres. Banks may require a larger deposit for smaller properties like this, which is unfortunate for those on a tight budget.

The Big Picture

If you’re simply looking for an investment that will provide an income and have less interest in moving up the property ladder or building equity, student accommodation may be a worthwhile investment. There’s an undersupply of purpose-built housing in cities like Melbourne that is making student accommodation a hot prospect from a short-term perspective. However, if you are looking for a long-term investment that you could build equity in and sell at profit in the future, it may be better to simply wait until you can afford a larger property. Investing in real estate involves a great deal of preparation and the necessary funds to get started, so you’ll want to think long and hard about whether student accommodation is right for you.

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