In Plymouth, the streets are paved with student accommodation.
Some of the developments, like the reinvention of former department store Derry’s, are backed by large commercial players. But other smaller projects are being sold on to ordinary retail investors, eager for investment opportunities outside the stock or bond market.
At North Hill Court, for example, you can invest in student studios and apartments on a 250-year lease from £79,950. Like other schemes sold on to retail buyers, the project highlights its proximity to universities:
The location of North Hill Court is ideal, with the highly acclaimed Plymouth University just a short walk away, as is the Plymouth College of Art. Plymouth University is ranked within the top 2% of degree granting institutions of higher education in the world.
The studios also come with a net income of 8 per cent over five years, guaranteed by Hermes Great Estate, the company selling them. Hermes has also pledged to buy the units back after five years at 110 per cent of the price, if investors so wish.
Such guarantees on rental income are common on unregulated alternative property investments. So how secure is this one?
The Plymouth accommodation building will have about 40 studios and apartments, of which the company says three quarters are already sold. The site is expected to complete in March. As of late August, it looked like this:
If all of the studios are sold, the scheme would bring in approximately £3.2m. To guarantee the rents for five years would cost a maximum of around £1.3m. The buyback would cost an additional £3.5m.
This takes the company’s total potential exposure to retail investors to £4.8m, in the very worst-case scenario of the rooms going completely unfilled and all of the buyers exercising the buyback.
On its Companies House accounts, Hermes Great Estate had just under £12,000 in cash in its bank account as of October last year. A year earlier, it had around £600,000, but a spokesperson said it had invested that money in other new projects.
A spokesperson said: “During the construction of North Hill Court we have invested in three additional projects which will return net profits of £2.27m by the end of 2020 and £4.35m by the end of 2021 respectively.”
So, the guarantee depends on the success of other projects, on the money from the other projects staying in the company, and on the company remaining solvent over the 5-year period. The scheme is expected to start in the next academic year, beginning in 2020.
In this case, it is the same development company that owns the freeholds that is offering the guarantee. In some other cases, a shell company is created separately to the freeholder that acts as a tenant to the investors, in turn collecting rents from students.
Earlier this year, the FT revealed that a £100m scheme run on this basis at 19 UK sites, including Stoke, Huddersfield, Bradford and Leicester, had collapsed. In that case, over 1,000 investors bought rooms on 250-year leases for £50,000 to £75,000, many of them after seeing adverts on Facebook, and were offered guaranteed returns of 8-12 per cent for 10 years.
The investors, as above, were receiving rent from a company that in turn sub-letted the rooms out to students. But as of February, only half of the rooms were filled, and the intermediary company is currently in administration.
The student accommodation boom also features on the CV of Stuart Day, former chairman of Bury Football Club. His company, Mederco, was involved in student accommodation projects as well as the sale of car parking spaces outside the stadium to retail investors for £10,000 each. When that project was promoted, investors were offered a buyback option after five years, and a 9 per cent return over a 10-year period. The spaces are now effectively worthless.
Unregulated property schemes are an alternative source of financing for developers, as opposed to a loan from a bank (one letting agent in Plymouth says the banks are “running scared” of financing student accommodation). But they also stand to appeal to retail investors actively searching for high returns on their savings. In the £100m scheme above that went wrong, one investor said she was reassured by the idea of buying into a company rather than just a property.
Part of the reason for this reassurance is regulation. FCA regulated investments tend to have to warn buyers (“your capital is at risk”), rather than offer them “guarantees”, especially ones based on projected income and uncertain outcomes. Ominous reminders of investment risk are generally missing from the marketing of unregulated property.
North Hill Court in Plymouth offers very high returns. Combining the buyback option and the guaranteed rent over five years, the investment would provide a 50 per cent return, or 10 per cent a year on average — a figure well in excess of the FTSE 100 over the past half decade.
“We are aware of the over supply of student accommodation in various locations of the UK,” the spokesperson for Hermes said, adding that the company obtains tenants from overseas “via a specific marketing company to students who are studying at the University”, and that it is “confident to back the rental income directly with our buyers”.
Higher Education: is Britain’s student housing bubble set to burst? — Financial Times
Collapse of UK student property scheme hits investors — Financial Times
How a £100m student accommodation scheme went wrong — FT Alphaville