Investing in university suburbs

Buying near a university can be a great way to ensure a steady supply of tenants, but there are also significant risks involved – most notably, the reliability of a primarily student demographic. With preparation, however, investors can navigate these risks to successfully invest in a university suburb.

Some universities dominate the area in which they are located, so it’s important for investors to ensure they’re not buying into a one-horse town.

Hot Property Specialists buyer’s agent Zoran Solano says while he has many clients requesting to buy in university precincts, he does not promote buying in an area that is solely reliant on a university. “This lack of economic diversity isn’t good for property,” he says.

Property Planning Australia director David Johnston agrees, emphasising that if the university is just one part of the economy and not its main driver, then the suburb has more potential to be a good investment.

“Ultimately, the fundamental growth drivers that impact property are the same irrespective of the town or city,” he says. “Therefore, people should still be considering the property in isolation of whether there is a university nearby.”

Even in a diverse local economy, there are many considerations to take into account before buying in a university suburb.

Looking at the market

One of the primary risks of buying close to a university is the limited pool of potential buyers.

“If we break down what drives growth values in property, it is simply the number of people who want to purchase that particular property,” says Mr Johnston.

Student accommodation offers little to owner occupiers. This significantly smaller buyer pool can have a knock-on effect with price, ability to sell easily, and capital growth.

Real Estate Buyers Agents Association president Jacque Parker says this is mostly a risk in slower markets.

“In a market like Sydney at the moment, that’s not such a risk. But if it was a slow market, investors have to be aware that in a mainly investor-driven complex, whatever has sold previously in that complex could affect valuation and they may not be able to sell the property for the price they want,” she says. “There’s a ceiling.”

Ideally, look for suburbs where the university scene is secondary to strong fundamentals.

However, it’s not all bad news. Ms Parker says that investors who approach a university market correctly can be rewarded with a ready supply of tenants.

Investors will also be able to plan around their tenants because they can be reasonably sure of the clientele interested in the property.

To best approach this type of market, the first thing to look at is the style of property. Ensure it matches the demographic of the area and that the area has a good history of capital growth and tenant demand for that type of property.

Mr Johnston says if you are buying into an area that may have limited capital growth but the investment still ticks the boxes, then you can still proceed. You must, however, ensure your numbers are accurate.

“It pays to be cautious and conservative, and consider who is telling you why the property is a good purchase,” he says.

Ideally, look for suburbs where the university scene is secondary to strong fundamentals.

“In these locations, you can find a better balance between homebuyers and investors, including emotional entrants who are cashed up,” Mr Johnston says.

Emotional owner-occupier buyers often drive up prices, so if an area is too reliant on investors, growth in property values may be stagnant.

Catering to students

When you’re sure the property market in a university area is a good investment, the next thing to consider is how to cater to your tenant demographic. You can do this by adapting the property to students’ needs, both financially and in terms of lifestyle.

Firstly, you will have to look for a property that students will be able to afford to rent. “Don’t buy a penthouse two-bedroom unit with harbour views because you’re not going to be able to get uni students who are going to be able to afford it,” Ms Parker says. “Or if they try and pay for it, they’re going to try and sneak more people in when it’s only meant to house three or four. So use your common sense,” she warns.

Secondly, the property needs to be low-maintenance and suit students’ living needs.

“Something with a really high maintenance garden and a water feature is a recipe for disaster. If it has a fancy garden, I would recommend replacing it with AstroTurf or a nice outdoor setting,” she says.

She also suggests that your property should have locks on doors and cupboards, internet capabilities in every room and sufficient parking. “All of those things matter to students greatly,” she says.

Finally, taking care of your property is imperative, so investors need to look into landlord insurance.

There is a stereotype about student tenants for a reason, Mr Solano says, and “share houses often have high maintenance costs and excess wear and tear on fixtures and fittings”. He suggests asking for a higher bond due to these risks.

Mr Johnston says investors should also look at why there are lending restrictions on these properties.

“Student accommodation can provide reasonable rental return, but they should also consider why lending institutions have LVR [loan-to-value ratio] restrictions on how much you can borrow for these units,” he says.

“Lender LVR restrictions are usually a good guide to help you determine risk in the prospects of capital growth in the property. Banks have spent more time analysing property risk on the macro level than any other group. This information can help to minimise the risk of making an investment mistake.”

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