Investment

Student housing has been a major beneficiary of the ‘flight to quality’ among property investors in the last five years. The volume of student housing transactions in Europe increased by almost 81% per annum, exceeding €1.4 billion in 2011, according to RCA. In the first half of 2012 investment volumes in the sector reached €1 billion, double that of the same period a year earlier. With yield compression in mainstream property assets, student housing is increasingly appealing. High yielding, with low voids, student housing has attracted rising volumes of investment from funds across Western Europe.

For commercial property investors looking for exposure to residential markets but without the attendant implications of direct ownership, student housing investment has provided a convenient, fully managed halfway house – producing income streams but on a single operational lease. In this way student housing investment has opened the door to ‘build-to-let’ or purpose-built mainstream letting blocks.

The student housing sector is counter cyclical, and the ability to deliver secure income during uncertain economic times is appealing to investors. This strategy has already paid dividends for investors in the UK market, so investors are beginning to look to Europe for new opportunities.

Yields

The market for student housing in mainland Europe is still in the first stages of development so performance evidence is sparse. Savills research into sample properties across the biggest European markets suggests that gross average initial yields range from 5.5% for prime property to 8.5% for secondary.

Prime achievable yields are in the region of 7% in Italy, the Netherlands, and Spain, while they can be as low as 5.5% in France, Germany and the UK for top-quality assets (Table 1).

Opportunities

Our findings suggest the greatest investment opportunities lie in established university towns with a low provision of student housing and higher costs of living and student rent, but with low market risk. On this basis, cities with large student markets, strong, high quality institutions and more affordable living and tuition costs feature highly. Paris, Milan, Barcelona and Amsterdam pose opportunities (see Graph 7).

UK cities such as London, Oxford and Edinburgh feature strongly as low supply cities. However, cost of living is high in a European context, as are tuition fees. Swiss cities such as Zurich and Lausanne also pose strong opportunities given the strength of their institutions and relatively low student housing supply, although their student populations are smaller.

Some Dutch cities, notably Utrecht, Rotterdam and Leiden have exceptionally low student housing provision rates coupled with high ranking institutions and modest living and fee costs, although the Dutch Government is undertaking measures to increase supply (see The Netherlands country profile).

German student cities rank relatively low in terms of rent levels, although student housing provision is only modest. There may be opportunities in the lowest supply, highest value locations, such as Darmstadt.

Set against a growing student population, the supply-demand imbalance in many of these markets presents an opportunity for investors and developers. Each country poses specific prospects and challenges. While the UK is now well established as a destination for student housing investment, the European market remains relatively untapped. Graph 8 shows the proportion of students studying in a Times Top 400 university within each country. Some 69% of students in the UK study in a Times Top 400 institution, followed by Sweden and Austria, both at 55%. This reinforces the appeal of these markets on a global stage, critical in attracting international students. It is with these students that the investment opportunity lies. The European student housing market can be challenging for international students to navigate.

Private student housing operators providing a one-stop-shop for international students in these markets may find themselves with a commercial edge.

A combination of a lack of supply and growing demand, alongside an expectation that yields will exceed that of other traditional residential and commercial real estate assets will continue to attract investors to the sector.

Taken from
Spotlight: European Student Housing