Student pods – the latest buy-to-let vogue, where investors buy a single room in a development – have been attacked for failing to deliver promised double-digit returns.
Attracted by guaranteed returns of up to 10 per cent and prices as low as £30,000 – substantially less than an equivalent buy-to-let property – investors have snapped up pods across the UK.
But because the properties are small, typically 12-13 square metres, the bite-sized asking prices belie high underlying property values. A £59,995 pod investment on the market in Canterbury, for example, costs more than twice the average for the city on a per square foot basis, according to Hometrack, a housing analytics company.
Student-accommodation blocks have performed strongly,
with annual returns of 9 per cent last year, according to estate agent Knight Frank. Rents have been buoyed by the growth of students from Asia, who typically prefer purpose-built housing.
The strong market has attracted sophisticated investors, including private equity funds and overseas institutions. According to Jones Lang LaSalle, the property group, transaction in the UK student accommodation market was close to £1.9bn last year, more than double the value in 2011.
But there are fears that some developers are using the buoyant market to sell inappropriate products to private investors.
Kavita Bachada, an employment lawyer, bought a pod in Liverpool for £42,000 in 2011, tempted by a 10 per cent yield guaranteed for 12 months. “There was nothing out there . . . that offered anything like these returns,” she said.
While the income flowed as expected for 18 months, it has since dried up. Middle England Developments, the developer, has now asked pod investors for a three-month “payment holiday”. It blamed a surge in vacancies caused by tuition fees, a clampdown on foreign students and a wave of development in the city.
One problem is that the eye-catching guaranteed yields are typically subsidised by the developer, so income from rents, and property resale value, may fall when the guarantee runs out.
Another developer, FreshStart Living, last month agreed a settlement to hand over a total of £131,000 in unpaid rent to 70 investors. It has since stopped selling pods to individual investors.
“The guarantees are rarely sustainable,” said Charlie Cunningham, its chief executive. “Investors are often left with a useless property from which they will not only struggle to generate a reasonable income but they will also struggle to resell.”
Mr Cunningham called for tighter regulation of the market, noting “people investing in property are not that sophisticated”.