Guaranteed 8% Net Returns. What's Not To Like!

Today, for example, I received an email from ‘Investment’ with the header ‘Luxurious Student Buy To Lets with 8% Net Returns’. There is a guarantee of at least 8% net for the next five years with a minimum price for a studio apartment starting at £85,000.

My first thought was, does this development actually exist and is there a record of any planning application where they say the property will be?

Surprisingly, when I looked it up there is a valid planning consent for a student block where they said it will be. The next question then is, has it been built yet? No not yet, but no worries it’s an off plan development and this is simply a pre-build marketing scheme.

And this is where the warning bells start.

It is a fact that recently student accommodation has become a vehicle for some unscrupulous developers seeking to get rich by to exploit their investors with what seems like a great investment on the surface.

An example of a typical student accommodation scam goes something like this:

• The developer buys some land near to a further education establishment, usually a smaller town that happens to have a ‘University’ facility (often a satellite building of a larger institution some miles away). 

• The developer gets planning consent for a student building housing, say, 120 students. All good, so far.

• The developer creates a marketing pack and starts selling off plan. This raises the capital to complete the build. Once completed, all monies are paid and the property is ready to be occupied.

• So the first part of the scam – the question of whether or not the student studio apartment is worth the £85,000 and whether or not it is even mortgageable on the open market? Many high street lenders won’t lend on studios or apartments less than a minimum area or even on student accommodation per se. This means that the only potential buyers are the building freeholder, other investors or cash purchasers. Often the original investors are people who are reinvesting their pension pots and so an original mortgage is less of an issue.

Why is this part of the scam? The freeholder knows that after the five years when you are not receiving the promised rent you may wish to sell the investment but to who? At this point the freeholder will offer to buy it back from you for a fraction of what you paid. Once they have done this they can then afford to let it out for less than they needed to pay you under the guarantee and they are quids in.

• The second part of the scam relates to the 5 year guarantee. Given that they are making a good profit on each studio apartment and that at least some of them will be rented out the developer will have enough cash to pay the 5% per annum for the next five years – in other words, you will get 25% of your investment back. This leaves 75% with the developer plus the rent.

What happens next is that in year six the return will be based on the rent of YOUR studio apartment. If it’s not occupied then the you will get no rent. Remember, this is secondary student accommodation in a secondary town where demand is likely to be low as well as rents. This means that what apartments are rented out first are likely to be those owned by the developer and not the investors. So, when the five years are up guess which will be rented out first?

This then ties back into the first part of the scam which is the over valuation of the original investment and then plan to buy it back cheaper later.

• The third part of this scam is the cleverest part. This is when two to three months into the guaranteed payments turning up in the investors bank accounts the same investors get a call from the marketing company to confirm you are receiving the guaranteed payments as promised. All is working as you were told they say and aren’t you pleased with the decision you made? 

After another month or so you they ring again and reconfirm the brilliance of your investment and recommend that you buy another apartment in the block or in another new scheme they are building in another town. This time though why not buy a couple instead of one given the returns so far? And this is where it goes…

For the first couple of years everything is great until the guarantees fall away. After a while the investor is left with several apartments that instead of generating 8% a year net are more likely to be generating a fraction of that or even making a loss after the management fees, ground rent, maintenance etc are taken into account.

And then back to the beginning……..buy it back cheap and start again. The original investors are thousands out of pocket and the developer has a fully paid for scheme generating an income for them using other peoples’ money.

Unfortunately, student accommodation has been hijacked over the last few years by many unscrupulous developers that raise the cash to build the properties and then use the same cash to promise returns higher than the market rate. 

Over time the developer will seek to repurchase the apartments for fraction of their original price or hammer the owners with punitive charges. The developer will seek to own the whole property over the medium term and eventually rent the apartments themselves. Alternatively they may bleed the management company dry and eventually put it and the property into administration having taken massive fees from the investors.

This is just a simple analysis of the type of student letting scams out there. There are more sophisticated versions where complex ownership structures mean that the investors are unwittingly at the whim of a third party and they could end up ultimately with no-one to sue if the promised returns do not materialise. 

This is not to say that all student investments are bad ideas. Indeed, they can be a very good investment if done properly. However, if an unsolicited email lands in your inbox offering a guaranteed net yield for a fixed period you might just want to think long and hard about whether this is the type of deal for you?

If it is then, like all property investments, make sure you do your due diligence. Employ good property specialists such as solicitors and surveyors. Use your own broker. Research the company selling it and their directors. Establish the ownership structure and who your contract is with. Establish your rights to redress. Know the limits of your liability. Find out about all possible running costs. 

Needless to say, today I sent the email from ‘Investor’ to my junk box to join the hundreds already in there. Can’t wait to see my email tomorrow, perhaps I’ll get some bitcoin scheme endorsed by the Queen or a Bulgarian airport car parking investment with 12% guaranteed returns?