Savills Residential Research has shown that the rented sector is still small, despite encouragement from Government to increase it. There is scope for further buy-to-let development and, even in the current market, there are opportunities for prospective landlords if they research where demand is likely to be high and look for ‘gaps’ in the current marketplace. Neil Batty and Simon Scott of FDP Savills explain why the current state of the buy-to-let market has led to niche residential investments becoming more established and attractive.

Q. Simon, the buy-to-let market has been much hyped over the last 2 years or so, but it now seems that buying residential property to let is declining. Why is this?

A. The perception is that capital appreciation on residential property has fallen off and this, combined with the relatively high cost of entry in relation to income returns, has made buy-to-let less attractive.

Q. If the sales market is less active, as predicted for 2005, then the rentals market invariably bounces back. Surely this makes the return on buy-to-let more attractive?

A. Yes, residential rentals are contra-cyclical to sales. But we are not predicting gross rental returns - that is before management costs and other overheads – to be much above 5% or 6% and so that is why the niche property investment sectors that Neil Batty and I are involved with are of particular interest to investors at this time.

Q. Neil, what exactly is your niche in the buy-to-let market?

Besides dealing with pre-market disposals of whole buy-to-let schemes to investors, I also act for companies that have launched a new concept in property investment. This offers property investors the opportunity to join a new generation of hotel owners, by way of buying their own individual hotel rooms in established hotel premises in London and across the U.K. Investors benefit from an experienced hotel management structure and obviously have no responsibility for running the hotel themselves.

Q. Okay – so what is the proposition here?

A. Its really quite simple. Investors can buy their own hotel room in an established hotel, typically on a 99-year lease. They then receive 45% to 50% of the hotel room’s income. They can also stay in their own room for up to 52 nights each year for a nominal rate of £15-£20 per night.

Q. So how many of these hotel schemes are in place?

A. A company I act for is ‘Guestinvest’ which has a partnership with an award-winning hotel brand, Alias Hotels. Owners in the Guestinvest scheme currently receive both a significant return in terms of income and a commercial property investment in one of three highly successful hotels. More hotels investments are planned.

Q. And what the current rate of return on the Guestinvest scheme?

A. Investors in Guestinvest are currently receive a net return of 6%which is in excess of average returns being received on more conventional buy-to-let schemes.

Q. Simon, what area of the buy-to–let business are you involved with?

A. Basically I deal with developers who are either constructing or converting buildings for use as student accommodation in the principal University towns and cities in the UK. These are usually arranged as cluster flats or studios and are appropriately furnished for student letting.

Q. Why has this clearly specialised market developed?

A. As Neil said, the conventional buy-to-let market has declined over the last 2 years by way a slackening rental income and reduced letting. Although the more usual buy-to-let market is still active, returns on investment have reduced and investors have had to look at holding property in the medium to long term.

While this is acceptable to most buy-to-let investors, some are looking for property investments which are valued by way of yield and which can produce higher net returns.

Q. So what are returns like in student accommodation?

A. Returns on student accommodation are generally higher than conventional buy-to-let and typically have a 6% net return.

Q. That sounds good. But how are the buildings managed?

The developers I act for are very professional indeed and establish a management company to handle all the administration, maintenance, security and billing.

Q. What are the rooms actually like?

A. The buildings are arranged in a sophisticated way either as studio units with small kitchens, bathrooms, sitting and working areas or arranged in clusters of 4 to 6 units with a shared living room. Investors tend to buy a cluster of units, typically for an amount equivalent to a flat of the same square footage.

The benefit of this is that in the event of a change in the market, by way of a reduced demand for student accommodation, then the clusters can be converted, with the agreement of the other owners, into flats which can then be let or sold.

Q. So what prices do these student apartment clusters start at?

A good example would be the Boulevard Works in Nottingham which is well located for the University and comprises 49 apartments arranged as 4, 5 and 6 bedroom apartments. A 4 bedroom apartment in this building starts at £190,000 and would provide a gross return per annum of £15,000 or about 8%.

Q. What other Student accommodation schemes to you recommend other than Nottingham?

A. We have three other schemes on the market, The Junxion in Lincoln, Leighton Hall in Preston and Q3 in Manchester. Without exception these developments tick all the boxes in terms of location, purpose built construction and will be offered pre-let. The projected gross rental income for these investments is 7% - 8% which is considerably better than many conventional buy-to-let investments.

If you are interested in learning more, click here to visit the FDP Savills website.

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