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Student Landlords: How to Diversify?

by StudyFlats

Portfolio Diversification, as outlined in a previous article, can benefit a property investor by combining a variety of assets to reduce the overall risk of an investment portfolio. This can improve the overall financial performance by reducing the impact of an individual market slump. 

Student landlords may feel that they have already pigeonholed themselves into one market, however this is not the case. Student landlords can diversify their portfolio whilst remaining active only in the student housing market. 

Ensuring a portfolio is not stacked too heavily in favour of one type of property will, avoid negative financial implications associated with any slowdown in one particular market. This approach can also allow the investor to benefit from an upturn in another market.There are multiple ways this can be achieved.

Asset Class Diversification

Asset class diversification involves making a portfolio diverse by including multiple types of property. Traditionally, investors will think of making a portfolio of properties including office, retail, industrial and residential properties. However student landlords can achieve a degree of asset class diversification while remaining in the student housing market. 

There are a range of types of student property available to invest in within the UK. As the most mature student housing market in the world there are multiple options, each catering to differing student needs. 

To achieve diversification in this sense, investors can include a range of different properties in their portfolio. Such as; Houses in Multiple Occupation (HMO) – which are favored among home students and those on a tighter budget; Rooms within Purpose Built Student Accommodation (PBSA) – which can be popular with first year students and those attending university from overseas; and Studio apartments – which can be attractive to student with a higher budget and potentially if needed, young professionals living in city centres

This can benefit investors as for example, if one year there is a reduced demand for studio apartments, the portfolio will continue to perform in other areas such as HMO and Student rooms.

Geographical Diversification

The geographical diversification approach means holding properties in a range of locations, rather than different asset classes. For student landlords this approach can be more straightforward as location choice will relate to university locations and performance. Different UK university cities may be at different points on the property cycle and also be experienced changing student demand levels. Investment returns will be impacted because of this. 

Due to student numbers, demand for student accommodation can fluctuate in certain cities. A portfolio spread across multiple cities should be less affected by this. A landlord may also benefit from better returns in one location.

A classic example of doing this would be to include properties from a mature and stable market, such as London, and also a less mature market. The investor will then benefit from the stable, lower returns of London, and also the higher but riskier returns in a growing location.

Investing in growing locations will also provide the greatest capital value growth.

Value Diversification

Value portfolio diversification is where a portfolio is diversified in terms of value, rather than location or property type. For student landlords this will mean a portfolio which includes properties with a range of rental values. From top of the market, luxury accommodation to low cost, shared houses. Traditionally, foreign students have been associated with luxury accommodation and the price that comes with it, whereas Britons tend to go for quality, low cost accommodations. 

Landlords owning a combination of high and lower cost options, will benefit from increasing rental demand in both demographics. Whilst also protecting themselves from any market fluctuations, such as a drop in international student numbers due to political decisions.

How to Best Diversify

Student landlords can diversify whilst remaining in their chosen market, by utilising any of the above strategies. However the most diversified portfolios will employ all three strategies. Owning a range of different property types, in multiple locations, with a range of value options for all budgets will result in a low risk portfolio. 

Whilst some landlords may not be able or willing to expand to a new location, they can protect themselves against possible market fluctuations in other ways, while remaining in the sector they know best.

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Investor Square. 2017. Accessed 28th January, 2020, from https://investor-square.com/investment-news/newswire/ways-diversify-property-portfolio/

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