In his Autumn statement to the House of Commons, the UK’s Chancellor Mr. George Osborne, announced changes that are likely to have a major impact on the central London residential market and the student accommodation sector:
1. Overseas investors will have to pay capital gains tax from 2015
Many people had always thought that if this was ever going to be introduced it would be the Labour party that would take that fateful step. It appears that the Conservatives have more back bone than many people thought. Mr Osborne’s statement that “Britain is an open country that welcomes investment from all over the world, including investment in our residential property. But it’s not right that those who live in this country pay capital gains tax when they sell a home that is not their primary residence – while those who don’t live here do not” is perhaps hard to argue with. Unless you are an overseas investor of course.
It will be interesting to see if developers who hold weekend exhibitions in Hong Kong, Singapore and Kuala Lumpur, and who sell vast numbers of London apartments, will enjoy the same level of success now that this tax will be applied to their buyers. Many of those buyers are seeking capital gains and whilst the finer details of the tax have not yet been decided, including the rate, its introduction will surely impact on demand.
The effect of this change is that many investors will decide that a higher rental yield is better than an uncertain capital gain that will be taxed. This is especially the case where the owner can claim a personal allowance to reduce his tax liability on his rental income. With the rental yield from student accommodation being seen as secure and attractive, more and more investors will enter this sector. That can only lead to one thing – student accommodation unit prices will rise. Good news indeed for the people who own units in well located student blocks.
2. The cap on the number of overseas students allowed to study in the UK is to be removed
Mr. Osborne has decided to increase the number of overseas students next year by 30,000. The year after that the cap will be removed and with no upper limit universities will promote themselves even more vigorously overseas as they seek to attract high fee paying students. There is already excessive demand for the limited number of purpose accommodation units that are available, but Mr. Osborne has taken no heed of this. In fairness to him, the impact of overseas students on the British economy is considerable and it is therefore understandable if he does not dwell on the problems these students have in finding suitable accommodation.
The upside of this change is that universities will recruit overseas students quicker than councils will grant planning consent and developers can build suitable accommodation. The result will be even stronger demand for purpose built student accommodation and, inevitably, higher rents. This is fine if you own a student accommodation unit, not so if you are a student trying to find accommodation. No matter how much rents rise though, students will keep going to university and the UK will still attract overseas students. A good British university education is certainly worth paying a little extra in rent. If you think rental yields in this sector are attractive now, in a few years time they will be even better.
We are pretty sure Mr. Osborne did not make his changes based on a desire to make student accommodation even more attractive as an investment. The good news is that they have. With more people driven to high income opportunities and rents likely to rise, the next few years will see even better returns for both both large and small investors in this sector.