Private investors will soon have a new way to invest in the booming market for student lets. The Student Accommodation Opportunity Fund, which is currently doing the rounds of wealth managers, is a promising variation on one attractive investment theme that the financial services industry has not yet overplayed.
Student accommodation has proved one of the best-performing sectors of the embattled property market over the past half decade. Purpose-built student blocks generated total returns of 11.5 per cent in 2011, according to a Knight Frank index. Returns in the conventional private-rented sector are harder to trace, but for well-managed properties in good locations they should be similar.
Historically 3-5 per cent, rental growth is likely to be lower this year, because the government's changes to the funding regime in October suppressed student numbers. But, as we explained in a feature at the time (IC 19-25 Oct 2012), this is better explained by one-off deferral issues and confusion over offers among universities than by the infamous fee hikes. John Hill at Luxembourg Fund Partners, which will manage the Student Accommodation Opportunity Fund alongside Ingman Capital Partners, is counting on future total returns of 10-11 per cent.
The fund is novel for two reasons. First, it will use its rental income to pay dividends of about 5 per cent. The existing vehicles - the Mansion Student Accommodation Fund, the Coral Student Portfolio and the Brandeaux Student Accommodation Fund - are instead aimed at private investors looking for capital growth.
Second, it will invest in converted houses - the realm of private landlords - rather than big purpose-built blocks. This approach has the advantage of liquidity - an important consideration for an open-ended property fund that may need to meet redemption notices (although there is still a 90-day lock-in period). The drawback is that it becomes a play on middle-class Britain rather than emerging market growth. The portfolio's value will end up reflecting house prices more than rental growth in purpose-built blocks, which have come to be seen as a proxy export industry - international students, whose numbers continue to boom, tend to avoid draughty Victorian terraces.
The bet on Middle England may, of course, come good if the regional housing market recovers. But it makes the vehicle look more like a hassle-free alternative to buy-to-let than another student accommodation fund. Either way, investors should probably wait before investing - the first to buy into an open-ended fund are clobbered by high fees, and distributions will only start after 18 months.