Should landlords invest near good schools?
Article Posted - 11th April 2019
A recent study by Santander found that parents of both primary and secondary school pupils would be prepared to pay a premium on the average property price to live in the vicinity of their first-choice, state-funded school. But could this ongoing trend for living near popular schools offer an investment strategy for some landlords?
Is investing near good schools a smart move for landlords?
According to the study by Santander published in September 2018, the premiums parents were prepared to pay ranged between 7 per cent (the equivalent of £18,091) in the South West and 15 per cent in London (£70,675). The research also quoted average premiums of 10 per cent (£15,499) for Wales and 5 per cent (£2,731) in Northern Ireland.
The situation is similar in Scotland, according to research by the Bank of Scotland, also released in September. It discovered that parents are paying an average premium of 36 per cent (£72,973) to live in the catchment areas of top-performing state secondary schools – particularly in Edinburgh, Glasgow and Aberdeen. This is a huge jump from the previous year, when it was 22 per cent (£41,441), and the list of top-performing schools has also changed considerably.
Just as there is a premium on buying property near good schools, there is also a premium on renting near good schools, although research focuses less on this. A cursory glance at one of the online property search sites will illustrate the higher cost to rent near a good school. Such is the importance of schools for most people searching for a home (to buy or rent) that both Rightmove and Zoopla configure their searches to include schools when considering properties on their sites.
Should landlords look to longer tenancies?
Renting has obvious benefits for parents, as schools can go down a league table as well as up. “With the mix of top schools changing so much from last year, there is a risk that parents focused on school catchment areas could spend money on a property only for the nearby school to drop out of the top-performing list in the coming years,” points out Graham Blair, mortgages director at Bank of Scotland. That is why some home-owning parents keep their options open by renting in the catchment area of a good school.
However furious debate on chat forums like Mumsnet tends to focus on wealthy parents who temporarily rent while maintaining their own property elsewhere, but the truth is usually more prosaic, says Chris Norris, Director of Policy and Practice at the NLA. “Anecdotally, there are always stories of tenants taking on an obviously unsuitable property in a good catchment area on a very short let – a family in a house in multiple occupation or a studio flat, for example,” says Norris. "In reality it's much less common - especially as schools now ask for proof of long-term residence. Instead we find that in areas of high demand, like London and attractive market towns, family housing in good school catchment areas can be a sound investment for landlords."
The Government is currently consulting on minimum three-year tenancies with a six-month break clause to give tenants – and in particular families – greater rental security. The proposal is not supported by the NLA and “could make it more difficult to identify a tenant who is only looking to move in and out again quickly,” says Norris. “If a family was trying to deceive the local authority when they apply for a good school, a three-year tenancy agreement provides the perfect cover. But it makes it very hard for a landlord to know how long they will actually have that tenant for.”
Where should landlords look to buy?
Separating fact from fiction can be tricky in an emotive area like education. The Good Schools Guide sums it up neatly when it says, “A school's popularity is often like the stock market: dependent on psychology and mob behaviour, rather than intrinsic value.” Nevertheless, checking the Ofsted reports of local schools and examining the Government's school performance tables is a good starting point if you're interested in attracting legitimate family tenants.
“It's the sort of information I would pick up from agents when I begin considering an area,” says experienced London representative for the NLA and landlord Richard Blanco. “Generally I would look for areas where schools are improving, rather than already graded ‘Outstanding', because that's one of a number of symptoms of an improving area. In London, when an area becomes fashionable, more middle-class people move in; they get more involved in running and supporting schools, and they demand higher standards of education. Wealth and standards of health and education are intrinsically linked.”
How can landlords maximise yield?
To maximise yield you need to catch an area on the up. Some landlords might also be worried that if a local school's reputation declines, yield could be affected. In truth, that's probably unlikely because parents are usually unwilling to disrupt a child's schooling unless something very dramatic has happened. “And deteriorating Ofsted ratings are often temporary,” Blanco says.
According to the Local Government Association (LGA), the fight for school places is only going to get worse. Based on the Department of Education's projections, the LGA predicts a shortfall of 134,000 secondary school places by 2023-24.
“We're not suggesting any landlord should leap straight into three to five year tenancies, but if you have a family who has been renting your property problem-free for a year, and you know there's a good school in the area, why not consider a longer tenancy?” Norris says. “At renewal point, have the conversation and negotiate on that basis. Families can turn out to be very positive and reliable tenants.”
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