Student units earn top yields, but lenders' reluctance pushes prices lower

The thriving student accommodation market doesn’t seem to be popular with lenders despite top yields.

Student apartments around major universities and colleges regularly generate 8 per cent yields, or twice the return of most short-term savings products, according to agents specialising in student property. But with most major banks blacklisting inner-city high-rises and tightening criteria for investors, purpose-built student apartment values are continuing to fall.

Stephen Fitzsimon, head of business development for Melbourne Real Estate, which rents more than 1,000 apartments in Melbourne's CBD, told The Australian Financial Review that the price of a small apartment purchased about a decade back had dropped by about 10 per cent to $210,000.

Fitzsimon said demand for accommodation from overseas students (particularly from China and India) is "off the charts" and "continues on an upwards trajectory".

More than 170 groups of students recently registered to view a one-bedroom apartment in Melbourne's CBD that was renting for about $430 a week, he said. 

"These apartments are yielding through their teeth.”

Rental activity will pick up further as the start of the second academic semester nears.

But lenders are reluctant to lend to investors, the AFR reported.

Lending to investors must be capped at 10 per cent annual growth, says APRA.

"If the banks changed their lending policy to allow normal mums and dads to buy, prices would go up because the yields are so strong."

Student apartments are popular with cashed-up self managed superannuation fund (SMSF) investors and retirees looking for yield. 

Overseas buyers are holding on to the apartments because capital losses have been offset by the rising Australian dollar. They are also used to offshore assets, particularly Chinese investors.

The gap between student numbers and student accommodation is rising.

In Melbourne, it is more than 84,000, according to JLL, while in Sydney it is about 43,000 and in Brisbane – excluding the Gold Coast – more than 18,000.

The gap reflects the underlying demand.

Savills' director of student accommodation Conal Newland said the ratio of purpose-built student accommodation in Sydney, Melbourne and Brisbane is about one bedroom for every 10 students, compared with more than two and a half bedrooms for each student in more established markets like London.

Overseas students in Australia are expected to increase to between seven and eight million in the next eight years from about 4.5 million now.