x Abu Dhabi, UAETuesday 25 July 2017

Student life could accommodate a good investment

Average occupancy levels for purpose-built student properties remains high at 97 per cent.

I am writing from the UK, where I have been watching my 18-year-old son complete his sailing instructor course on the Solent. After an intensive five days of sailing, he is now qualified to work in exotic locations during his summer holidays, thus reaping the benefit of my wise investment.

It's a far cry from my own experience. I spent my summers working in the Kia-Ora Suncrush factory in Harrow and Wealdstone, where I was responsible for prising open wooden boxes of oranges with a crowbar so that the ladies in front of me, armed with their knives, could flick out the green calyx before despatching the whole fruit to the crushing machine.

While this was a life-defining experience for me, I have no wish to see my son learn his life skills in the same way. And especially not while standing ankle deep in Worcestershire sauce because the forklift driver had punctured wooden storage barrels located, for inexplicable reasons, next to the de-calyxing section.

Which brings me, rather tenuously, to Lord John Browne, the former head of BP, who recently put forward his proposals for the future funding of university education in the UK. If these proposals, as presented in the Browne Report, are passed by parliament, then:

Ÿ Universities will be allowed to set their own tuition fees, with the current fee cap of £3,290 (Dh19,418) per annum to be abolished;

Ÿ Universities will face a penalty if tuition fees are raised above £6,000 per annum;

Ÿ Students who are financially better off will pay more for their state student loans;

Ÿ Students will not have to repay their loans until they have graduated and are earning at least £21,000 per annum, with any outstanding debt written off after 30 years.

These changes are expected to be introduced in September 2012, but for the 2011 academic year, universities expect a scramble for places before any tuition fee increases. And, as universities come under increasing financial pressure from funding cuts, they will seek to attract more overseas students who traditionally have demanded high-quality student accommodation.

According to a recent report published by King Sturge, the international property consultants, demand for higher education in the UK has never been stronger. The total number of full-time students in higher education increased by 7.5 per cent since King Sturge last reported in 2008.

In the case of university places, demand is even more robust: in February this year, applications increased by 23 per cent compared with the previous year.

The report argues that despite limited government funding, UK schools have been informing their pupils that in a tough economic climate, they need to secure a degree to maximise the chances of getting a job. This helps to explain why average occupancy levels for purpose-built student accommodation properties remains high at 97 per cent.

Although universities must abide by government quotas for the number of UK and EU students, there is no limit on the number of overseas students they can take. Overseas students mean more revenue for universities and increased demand for a higher standard of accommodation.

All this presents continued opportunity for companies that specialise in providing high-quality, purpose-built accommodation for students. From an investment point of view, the critical factors are rental values and occupancy.

According to the King Sturge report, rental levels in the student sector since 1995 have consistently outperformed other UK property sectors as well as the Retail Price Index. And, as mentioned earlier, occupancy figures are phenomenally high.

One of the leading companies in this field is Brandeaux's Liberty Living, which recently received an award from the National Student Housing Survey 2010 for Best Private Halls.

This all makes good economic sense, but how does the average investor, like you and me, get involved and what are the risks?

Well, Brandeaux makes this possible through its Student Accommodation Fund. With average performances of 9.68 per cent per annum in sterling since inception, 9.87 per cent in the past 12 months, 33.33 per cent in the past three years and 62.03 per cent in the past five years, the fund's performance is as close as you can get to a straight line without using a ruler.

So what's the catch? Well, it's all in the pricing methodology. Unlike a company share, where market price is determined by supply-and-demand pressures through a stock exchange, the price of the Brandeaux fund is determined by independent experts with reference to future rental-income streams, which, as we have seen, are non-volatile.

This system worked well enough until the recent credit crisis, when the fund, like many other property-based funds, closed up shop to stop redemptions. Happily, it is now back in business, but redemptions are subject to six months' notice.

This is a good fund and will add stability to a balanced portfolio, but it is important to read through the amazing performance figures to understand the potential liquidity issues. The best way to deal with this, as ever, is not to put all your eggs in one basket.

 

Bill Davey is a financial adviser at Mondial-Financial Partners. If you have questions about this column or any other financial matter, contact him at bill.davey@mondialdubai.com