Renting properties to students has been a good business for Rakesh Parmar. He has a full-time job as an IT and data quality manager with the NHS, but also manages eight properties in Leeds.

His father started in buy-to-let in the 1980s with one property, which Parmar helped run. Then, the younger Parmar would write an advertisement on a card and put it up in the local shop. Today, all the homes are advertised online through student accommodation platforms. 

Regulations and health and safety demands have proliferated since his father’s first forays into the sector. But Rakesh Parmar continues to manage the properties himself and has financed the expansion of his portfolio.

“I market the houses, arrange the viewings and carry them out, draw up the contracts and do the maintenance — everything from A to Z,” he says. This helps him reduce costs by allowing him to dispense with the services of a letting agent. 

Student lettings can hold a strong appeal for landlords. By maximising the capacity of their properties and typically letting to groups of student friends on an annual cycle, they can earn a better return on their investment. 

The number of students in the UK has risen by 43 per cent since the turn of the century, keeping landlords supplied with tenants and greatly reducing their risks of voids or vacant periods. In the same period, rising house prices helped landlords accumulate equity in their properties, while ultra-low interest rates fuelled further investments. 

But student property landlords now face many of the same pressures bearing down on all buy-to-let landlords: the end of cheap mortgage debt, the loss of tax reliefs and the impact of inflation on costs of all kinds.

They are also confronting a fundamental threat to their business model, as the renters reform bill currently going through Parliament abolishes the fixed-term tenancies that such landlords rely on to move students on after a year and sign up the next cohort. 

The FT reported this week that ministers are to press ahead with the second reading of the bill, bringing it a big step closer to becoming law.

Landlords in the student niche, in short, face a decisive period, as demand grows stronger but regulatory uncertainty clouds the outlook for the sector. Can they still do well?

Boom time?

The number of students in UK higher education ballooned from 2mn to 2.86mn between 2000-01 and 2021-22, according to the Higher Education Statistics Authority. This growth has driven demand and raised rents for properties, both in the private rented sector and the purpose-built student accommodation (PBSA) blocks funded and run by large companies. 

Most of this growth is accounted for by UK students, but international student numbers have also been rising, particularly those from China and India (see box). Richard Ward, head of research for student rental platform StuRents, says that while demand is up, the supply of student housing is constrained. Many councils, preferring students to reside in defined areas, make it difficult for landlords to turn domestic housing into houses of multiple occupation (HMOs), of which rented student housing is one type. Ward adds that the growth of purpose-built, institutional student housing has also slowed, with fewer new developments hitting the market. 

What this means for landlords, he says, is that “you’re probably going to get decent rental guarantees, decent yields and full occupancy. So, those broad fundamentals are pretty attractive.”

Data last week from buy-to-let lender Paragon Bank found rental yields (rental income as a proportion of property value) for landlords letting to students rose from an average 5.6 per cent in September 2020 to 6.7 per cent in August 2023. The biggest yields were to be found in smaller university towns, such as Stoke-on-Trent with a yield of 9.4 per cent, and Swansea with 9.2 per cent. 

Richard Rowntree, managing director of mortgages for Paragon, said: “Despite not typically attracting the largest student populations, these locations can benefit from property that is more affordable to purchase, while having less competition from purpose-built student accommodation.”

These signs of demand are also reinforced by research that underlines the enormous cost pressures on renters in general. Average UK rents rose by £1,320 in the year to September, or £110 a month, to an annual £13,956, according to property site Zoopla. This put rental affordability at its worst level for a decade, with accommodation costs eating up 28 per cent of income.

Among the UK nations and English regions, Scotland’s rents on new lettings rose fastest of all, at 12.7 per cent, following the introduction of a rent cap of 3 per cent for existing tenancies.

Signs of selling

So if demand is motoring, are more landlords entering the sector? Data on sales by landlords of student properties is hard to come by — but what there is suggests the opposite. The Bank of England does not produce data on student lets, but in July said there had been a net loss of around 100,000 properties across the buy-to-let sector in 2022 (including homes rented to non-students), with those sales going to non-landlords.

It also noted a shift from smaller to larger landlords. “Market intelligence suggests that larger-scale, professional landlords are taking up an increasing share of the market as smaller landlords exit,” it said in its July financial stability report.

This is backed by anecdotal reports from market experts. Chris Norris, policy director at the National Residential Landlords Association, which represents buy-to-let landlords, says he is seeing more landlords selling, for a number of reasons.

First, conditions are “very challenging” for new entrants as well as existing landlords looking to expand, with high interest rates relative to the past decade, high property prices and persistent uncertainty about the path of interest rates. 

Some of these landlords find themselves in a financial corner, he says. “We’ve got lots of landlords who can’t make the numbers stack up. They have businesses that are quite keenly predicated on low interest rates . . . And it makes it very difficult for many of them to break even.”

Another factor — also affecting the student market — is demographics. Those who got into the market around the turn of the century, as the buy-to-let business had become an established investment option and student numbers were growing fast, are now contemplating the sale of some of those assets. 

Victoria Tolmie-Loverseed, assistant chief executive at Unipol, an accreditation body for student bed spaces, says: “We have a lot of landlords in the student sector who bought homes when student housing really boomed in the early 1990s. There are people who are now at retirement age and are getting out of the market.”

Surveys of landlords by Unipol in Leeds and Nottingham also suggest it is the smaller landlords with fewer homes in their portfolio who are selling, she says. 

Some homes were no longer available to students, says Tolmie-Loverseed, because of higher demand for these HMOs from young professionals. In previous years, workers would have opted for smaller one or two-bed homes, but were no longer able to afford these or were saving for a housing deposit. 

In the student heartlands of Headingley in Leeds, for instance, the make-up of residents was becoming far more mixed, she says, because young professionals were seeking affordable homes. In Bristol, where a shortage of student housing is on the rise, “I suspect a lot of that is because of other young renters moving into the student market,” she says.

The chief financial problem for many landlords with big mortgages remains, however, the cost of buy-to-let loans — both fixed and floating rates — which have been rising sharply until recent weeks, when a burst of competition among lenders reduced rates slightly. Nonetheless, average rates on a five-year buy-to-let fixed mortgage remain high at 6.18 per cent, compared with 3.18 per cent in November 2021, according to data provider Moneyfacts.

Property investors now pay £15bn in mortgage interest every year, up by 58 per cent since November 2021, on the eve of the Bank of England’s rate rising campaign. Hamptons, which estimated the mortgage bill, put the rise down to higher interest rates for investors buying homes, dearer tracker rates and a wave of cheaper fixed-term deals expiring and requiring refinancing. 

Could landlords take advantage of rising rents to offset their higher mortgage costs? Housing experts say many already are, but their ability to do so is limited by local as well as national factors. As Tolmie-Loverseed points out, the government has raised student maintenance grants by 2.8 per cent for this academic year, well below the rate of inflation. 

“There is a ceiling. Landlords have to be cautious about rent increases because student housing is also very localised. It would be very easy to be very bullish about rent rises in one city and then and then get caught out by it elsewhere.”  

Renters reform bill threat

Asked for their views on the outlook ahead of this article, several FT Money readers with student properties pinpointed the rental market legislation going through Parliament as a serious worry. The bill does away with short-hold tenancies and so-called Section 21 evictions, which allow landlords to gain automatic possession of their property without giving a reason. 

This is potentially a big problem for landlords of student properties, which operate on a rigid annual cycle. Students and landlords alike need the certainty of a start and end date to the tenancy, so the next year’s cohort can agree to the tenancy well in advance of moving in. 

“There’s no means for bringing a tenancy to an end [in the bill] unless you meet very clearly defined grounds, none of which are specifically about students,” says Norris of the NRLA. The legislation, he adds, does not apply to purpose-built student accommodation, where institutional owners retain control over tenancies.

The lengthening lead time for agreeing a tenancy shows how high demand has put a premium on this certainty. When Parmar, the Leeds landlord, began in the business more than 20 years ago, the next year’s tenants typically viewed homes around Easter. This year he will start advertising his properties in November for renting in September 2024.  

Ward of StuRents says Durham is even earlier, with letting agents already marketing viewings for next year — around a year in advance. He adds: “Some of these early indications of rental prices from Durham are 15 per cent up year on year.” 

The government is looking to push the legislation through but uncertainty remains over whether it will be amended to recognise the role of individual landlords in providing student property.  

Parmar is hopeful changes will be made when it comes to “crunch time”. But another landlord, Luke Blaney, who says the sector has been “a great investment” over the years, is worried by the implications of the bill.

“If students can up and leave when they want in the tenancy, you are going to need to manage this as a full-time job to replace them . . . It looks like you will spend much of the year with empty properties as the season is cyclical and yet the tenancy won’t be,” says Blaney, co-founder of his property investment company Halland Homes.

His advice? See what happens with interest rates and the renters reform bill — but avoid investing for now.