Student accommodation rentals: what you need to know as an investor

Are you considering investing in student accommodation? It’s a lucrative market, but there’s plenty to think about before diving in. From rental trends to student preferences and how to choose the right neighbourhood for your investment property, we delve into what you need to know so you can make an informed decision. 

Why are student rentals so expensive?

In areas where student housing is scarce, rental prices skyrocket. For example, in Stellenbosch basic bachelor apartment within a kilometer of campus can cost up to R13,000 per month. Why? Location and parking challenges. Moving further from campus, you can expect prices to drop by 20-25%.

Rising costs: levies and rates

It’s not just demand driving up costs. Levies and property rates have been climbing steadily since 2015. For property investors, this means higher expenses—and for students, it can make affordability a real issue. While many students rely on parental support, others might need to juggle part-time jobs to meet rental obligations.

As an investor, you’ll also need to ensure your tenants can pay consistently, possibly by requiring some form of security, like a co-signer or a parental guarantee.

What about NSFAS students?

The National Student Financial Aid Scheme (NSFAS) offers financial support, but there’s a catch: NSFAS-funded students can only afford rentals that include all utilities—water, electricity, Wi-Fi, and security. In areas like Potchefstroom, they receive just R3,200 per month, while privately funded students might pay R4,350 for a one-bedroom apartment.

To cater to NSFAS students, many opt for commune-style living, such as room-sharing or apartments. If you’re looking to invest, check out NSFAS-accredited properties—they can offer reliable demand in areas with limited options.

Location, location, location

The location of your investment is critical. For instance, Rhodes University in Grahamstown (Makhanda) has experienced a shift in demand. The university’s focus on NSFAS students and the aftermath of the #FeesMustFall movement have made it less appealing to wealthier students.

This has led to lower rental prices and a preference for 10-month leases, which can be a challenge for investors. However, it also presents opportunities to buy quality properties at discounted rates.

Here are our top tips for choosing the perfect neighbourhood for your investment property:

1. Consider the overall quality of the neighbourhood: If you're entering the rental market, the quality of the neighbourhood is paramount. A good area attracts better-quality tenants. Investing in a smaller property in an excellent area is wiser than the largest house in a subpar neighbourhood.
2. Vacancies and demand: Research the number of properties available for rent in your target suburb. A high demand for rentals typically allows landlords to charge higher rents. Be cautious of neighbourhoods with many available properties, which may lead to increased competition for tenants.
3. Evaluate the average rent in the area: Ensure that the rental income in your chosen neighbourhood covers your loan repayments, capital investment, and other property-related expenses. Understanding the average rent helps you make informed decisions about the financial viability of your investment. We advise involving a local property professional who not only understands the market but will be able to assist you in finding the right property for your investment needs.
4. Account for property taxes and levies: Property taxes and levies are inevitable costs that can impact your rental income—research council taxes and, if applicable, the monthly levies charged in complexes or estates. Higher facilities often correlate with higher levies. If you are contemplating an investment property in a sectional title scheme make sure you understand all the rules and regulations that would apply to you and your tenants. Also, ensure that you ask for financial statements and check that all the rules are registered at the CSOS.
5. Know the resident demographic: Identify the type of tenants you want to attract. Your property should align with their preferences and needs. The needs of a family will differ from a young professional just starting out - understanding this will help you understand what type of property and area you will need to look at. Consider existing demographics as well; proximity to a university may attract students rather than families, for example.
6. Check the crime rate: Safety is a crucial factor. Investigate the crime rate in the neighbourhood and surrounding areas. Engage with locals and inquire about neighbourhood watches, security patrols, and overall safety measures.

What are students looking for?

If you want to attract tenants, your property needs to tick certain boxes. Here's what students typically prioritize:

• 24-hour security
• Fast Wi-Fi
• Convenient amenities like coffee shops and gyms
• Proximity to campus
• Undercover parking
• Backup power systems

Should you furnish your property?

It’s better to keep student rentals unfurnished. Why? Furnished properties don’t yield significantly higher returns, and buying furniture adds to your initial expenses. Plus, students may not treat your furnishings with the utmost care—replacing items like mattresses or crockery can eat into your profits.

Challenges to consider

Investing in student rentals isn’t without its hurdles. When considering investing in student accommodation remember:

1. Seasonal rental fluctuations: While students are your main tenants, tourism, university events, and other industries can also drive demand.
2. Maintenance costs: Spies advises setting aside 5-10% of your rental income for upkeep. If you don’t use it immediately, roll it over for future repairs.

The long-term return

What’s the payoff? Great returns can be achieved if you hold onto your student property for 5-10 years. To make it work, ensure your rental covers all expenses, including agent commissions, levies, and potential capital gains tax.

Some parents even buy apartments for their student children, who sublet a room to cover costs. Once their child graduates, many keep the property as a rental, turning it into a steady source of passive income.

Why student rentals are a smart move

Student accommodation near educational institutions often generates higher rental returns than other property types. With the right approach and location, you could see a faster-than-expected return on your investment.

Navigating the regulatory landscape

Investing in student accommodation in South Africa requires a deep understanding of the regulatory landscape governing this sector's real estate. Investors and developers must navigate a complex framework from zoning laws to safety standards to ensure their projects are compliant and successful.

Zoning laws and land use

• Local zoning regulations: The first step in developing student accommodation is ensuring the property is zoned correctly for such use. Municipal zoning laws dictate what types of buildings can be constructed or modified on a given plot. Investors may need to apply for rezoning if the current designation does not allow for student housing.
• Special permissions and land use rights: Depending on the project, additional land use rights may be required. This could include permissions for increased building height, reduced parking requirements, or allowances for additional occupancy.

Building and safety regulations

• National building regulations: South Africa's National Building Regulations set minimum requirements for safety, sustainability, and usability. These cover fire safety measures, structural integrity, and accessibility—crucial for student housing.
• Fire safety compliance: Fire safety is essential in student housing due to high occupant density. Proper escape routes, fire alarms, and extinguishing systems are mandatory.
• Health and safety standards: Regular inspections ensure compliance with ventilation, sanitation, and electrical safety standards, protecting residents and safeguarding investments.

Other Regulatory Considerations

• Environmental compliance: Developments may require environmental impact assessments (EIAs), particularly for large-scale projects or in sensitive areas.
• Tenant rights and lease agreements: The South African Rental Housing Act and Consumer Protection Act protect tenant rights, including reasonable lease terms, privacy, and clear guidelines for deposits and evictions.
• Local bylaws and community Standards: Noise regulations, waste management, and other local bylaws play a significant role in the smooth operation of student accommodations.

To ensure a property is compliant and suitable for student accommodation you can go through the following channels:

Investors should check the compliance of a building for student accommodation through the following channels:

1. Municipal Offices

• Visit the local municipal planning or zoning department to confirm the property’s zoning designation.

• Check if the property meets the requirements for student housing or if rezoning or special permissions are necessary.

2. National Building Regulations and Building Standards Act

• Ensure the property complies with the National Building Regulations for safety, usability, and structural integrity. This includes fire safety, accessibility, and health standards.

3. NSFAS Accreditation (If Applicable)

• For properties intended for NSFAS-funded students, check the NSFAS accreditation criteria and verify with the relevant institution or NSFAS itself. Accreditation ensures the property meets specific standards, such as utility inclusions and affordability.

4. Local University Housing Departments

• Many universities have housing or student affairs departments that maintain lists of approved student accommodations. Verify if the property is on their approved list or understand their accreditation process.

5. Environmental Affairs

• For new developments or modifications, check with the Department of Environmental Affairs for any required Environmental Impact Assessments (EIA), especially in sensitive areas.

6. Professional Consultants

• Engage with real estate professionals to ensure compliance with all legal and regulatory requirements.

• Hire professional building inspectors to assess the property for compliance with health, safety, and fire regulations.

Ready to get started? Research your market, assess the demand, and tailor your property to what students really want. Your investment could turn into a reliable income stream for years to come.

Looking for more information on tax on rental properties? Here is our guide for landlords and rental property tax