Halls of distinction: why student rentals are a smart investment

University towns are riding high, with prices rising by 70 per cent in a decade. Investing in accommodation to rent to students is a wise buy, says David Spittles

Rising tuition fees and a leap in halls-of-residence rents are prompting more parents to consider buying a property for a daughter or son at university. It can be a smart investment: you pocket a steady income from other students after your own child graduates, then wait for the capital value to grow.

The right property could even become a second home or main residence for you later on.

While rich parents have always splashed out in star university cities, middle-income parents are now releasing equity or, more likely, raising buy-to-let mortgages, to purchase property. Rather than merely a "peace-of-mind" short-term solution, it is a long-term investment driven by informed property judgements.

Often this means buying posh flats in more expensive locations that appeal to wealthier, foreign students.

With 40 higher education institutions, London has the lion's share of full-time students – 291,815 in the 2011 academic year, nearly 10 times more than Oxford – and is the top location for investment, according to estate agent Knight Frank.

London is a special case. Its property market is driven by many factors, so homes let to students go up in price for various reasons, whereas in new and old university towns, students are the key influence.

Often the highest "yields", or percentage rental returns, are outside the capital, especially in lower-value areas because rents are a higher proportion of the property price. Owners can expect yields of about 6 per cent, perhaps twice as much for multiple occupation houses let to students.

Research by Lloyds TSB shows that average property prices in new university towns (those established since 1960) jumped by 70 per cent during the past decade – more than in dearer old university towns (64 per cent) and better than the 62 per cent price rise recorded for Britain as a whole.

In London, just 15.4 per cent of students are housed in university-owned blocks, meaning there is huge demand for private accommodation. Knight Frank estimates that another 100,000 student units in the £150-£200 a week range are required.

Certainly student digs are graduating to a new level with the advent of specialist companies and developers, such as Unite, offering purpose-built rentals. Nido has funky new blocks in King's Cross, Spitalfields and Notting Hill, and charges up to £285 a week. It offers 24-hour security, free gym and internet connections, in-room entertainment and paid-for extras such as maid service and dry-cleaning drops.

Parents who buy in their own names face capital gains tax when selling the property because it will not be deemed their "principal residence".

Some savvy students are becoming landlords themselves, buying in their own names and taking in tenants to pay their way through college.

Jennifer Turnbull got a surprise graduation present earlier this year: the north London flat where she has been living while at university. "My mum and dad bought the flat just after I took my A-levels," she said. "They said it was a pension nest-egg for them and that I could live there rent-free while at university. I'm incredibly lucky. It means I can get on with my life without being saddled with debts. I'm going travelling for a year and have found somebody to rent the flat while I'm away."

Two-bedroom flats are popular because students can share with a friend, generating extra income for parents. Ideally, buy a property that has wide rental appeal – say, a City-fringe or Canary Wharf apartment that young career professionals would find attractive, too.

London Metropolitan University, based in Holloway, has the highest number of overseas students in the UK, a fact that has not been lost on parents buying at Highbury Gardens, a new scheme just a short walk away from the college. Apartments start at £375,000. Call Savills on 020 7016 3865.

"Off the peg" student property purely for investment is growing in appeal, too, because of the stark supply-and-demand imbalance.

Basically, you buy into an investment fund, which offers a guaranteed return, or you purchase a property directly at a managed student hall of residence or at a private development.

"It's a low-risk, hands-off investment," says Stuart Law of property intermediary Assetz, which sells high-yielding flats priced from £60,000 in towns and cities across the UK. Call 0845 4009000.

However, the National Union of Students is concerned that new housing being provided by commercial companies is overpriced and over-specified. Unite, which began seven years ago, now offers about 35,000 studios in accommodation blocks and student villages in most British cities. It has even opened a retail "shop" for apartments in Bloomsbury.

But student blocks do not suit everyone. Wayne Oruye, who is studying at Reading University, moved out of halls of residence after his first year to buy his own property, with the help of the bank of mum and dad.

"Student halls are ghostly during holiday periods, whereas here I feel part of a proper community all year round. The home will serve my needs after I graduate because it's an easy commute into London and handy for Heathrow when I fly out to visit my parents in Nigeria."

He purchased a two-bedroom apartment at Kennet Island, a new residential hub on the fringe of the town centre. Prices start at £147,950, making it a relatively affordable purchase.