Most people prefer to buy new but sometimes it doesn’t make any sense when the older version is equally as good. You can have this debate with yourself every time you go car shopping.
For student housing, many investors prefer new for a variety of logical reasons such as the advantages of warranties and the comfort that they – at least for a period of time – own the newest and hottest product in town.
You can’t argue with that, and indeed the point here isn’t to try to argue that second hand student accommodation is better than new-build student accommodation. Just like when buying a car, for some it never will be an option but it is at least important to appreciate some of the advantages that second hand opportunities provide.
Here are some highlights:
You can make investment decisions based on accurate data specifically about the asset. This de-risks any acquisition. The ability to draw down on three year utility costs can help to better define gross to net assumptions, where similarly three year occupancy records will support both void and rental growth expectations. If the asset has performed a certain way in the past, there is no reason why there should be any meteoric change in the future. This is better than woolly projections.
There is always some uncertainty when setting rents for the first time for new accommodation. And with the way the student market works in practice, there isn’t much room for error in the small window of opportunity provided for marketing. A second hand product has proven its rental value so you’re not faced with the same level of uncertainity.
Admittedly this works both ways but if you can adopt a building with good online reviews, this will immediately work in the favour of the incoming investor. Students (and parents) take great comfort from what their peers have experienced in the past; it sways their decision making. It is beneficial to acquire from a reputable and trustworthy brand.
Existing student housing opportunities benefit from an established online presence whereas a new build property starts from scratch, and may require significant capital expenditure to raise its online presence. One of the biggest drivers of operating budgets at present is the increased costs of marketing, which makes sense given many markets are now maturing with a plentiful choice of accommodation on offer.
Knowing your market intimately is now absolutely critical when investing in student housing. Some opportunities would appear prime but yet never really succeed. That’s because target demographics can have different locational aspirations. So whilst a site may appear ‘prime’ in the context of a university campus, if you get your target audience wrong it could be destined to fail. Operating assets have already established a target audience. If prime opportunities are not working then perhaps consider this as a reason why.
We are now at a point where it isn’t economically viable to build new student accommodation in some cities in the UK. The spotlight on contractors and the subsequent requirement for T1 and T2, in addition to rising build costs are putting many potential development opportunities into the negative. This is especially the case where rental levels are deemed to be limited. If it is £145p/w on a 52 week contract that is required to make an appraisal stack up but your market cannot support that level of rent (and there are many that cannot), you can’t build it.
This will hamper development in good regional university towns and cities. Buying second hand opportunities in these locations could be deemed a clever move because you are less likely to face a growth in competing product.