The student housing market came of age during the global economic downturn. There was a surge in student numbers across continents as jobs became scarce and the recessionary tendency for workers to up-skill took hold. This, in turn, increased demand for student accommodation, which in many cases has significantly outpaced supply. Supply has been relatively suppressed by recessionary-low levels of development funding (despite the fact that student housing has often been able to attract more than its fair share of this).

At the same time as the West has been riding out recession, the creation of new wealth in Asia has fuelled the international student market. More Asian students have been seeking an English-language education. New levels of Asian wealth have meant that they have been seeking higher standards of accommodation.

This ‘perfect storm’ of both ‘pushed’ and ‘pulled’ demand (albeit at opposite ends of the budget spectrum), coupled with low levels of supply, has prompted more investors into what looks like a distinctly counter-cyclical sector. Student housing has consistently been one of the best performing sectors during the global economic downturn. The world student housing sector expanded rapidly from a 2009 low of $0.8bn investment globally, to a high of $7.2bn in 2013 (see Graph 1).

Integral to the expansion of investment volumes has been an increasingly mobile global student market seeking high quality, purpose-built student housing. English speaking countries, chiefly the US and the UK, have been the biggest recipients of these students, and have led the way in the provision of accommodation to meet the growing demand. Consequently, they have become the most developed of all the global student housing markets – despite still not being fully supplied.

The US stands out as the most mature student housing market. Private operators emerged there during the early 1990s. One sign of the USA market’s maturity is the number of student housing real estate investment trusts (REITS) that are now traded. American REITs are among the biggest investors in the sector today.

The next most mature market is the UK. This market expanded rapidly during the noughties and has even maintained momentum during recession, as cash-strapped universities partnered with private providers to upgrade their aging stock. Major players such as Nido and UNITE have carved niches which offer quality off and on-campus products but these are not traded in REIT form as they might be in the US.

Together, the US and UK markets have pushed global investment in student housing to new heights, increasing 780% since 2009. Volumes are up 114% on 2007 levels, reaching a new high of $7.2bn in 2013. This comes at a time when real estate investment globally remains suppressed; world office investment volumes, although orders of magnitude larger than student housing investment volumes, are still 43% down on their 2007 peak, and retail property investment remains 20% from its 2007 peak.

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Market structure

The composition of the global student housing investment environment has been changing. Looking at deals larger than $7.5m and excluding land sales, investment into UK student housing exceeded that into the US for the first time in 2013 (Graph 1). The growth of the UK sector has been driven by the consolidation of portfolios, funded by cross border investment, which accounted for 72% of investment activity by volume in 2013. The majority of this capital originated from the United States, the country with the longest track record in the sector. The Americas contribute 54% of all cross-border investment outside their home country globally, with Asia and EMEA equally sharing the rest.

Strong transactional activity in mature markets has put downward pressure on yields as capital values have risen on the back of this strong demand and short supply. Yields have moved in from a peak of close to 7% in 2009 to 6.3% in Q1 2014. However, income returns in the sector still exceed the residential investment market as a whole. Global residential yields stood at 6% in Q1 2014 and many internationally invested major world conurbations see rental returns considerably lower than that.

The potential for further downward yield adjustment is highlighted by the fact that the student housing sector is significantly less volatile than its residential counterpart (Graph 2). This downward yield movement suggests that there has been a re-assessment of risk in this emerging asset class and also highlights the counter-cyclical potential of the sector which has shown strong performance in otherwise difficult economic conditions.

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Opportunities

The US and UK are home to the most mature markets but still offer potential through consolidation, new development and acquisition. Other countries are earlier on the investment curve and offer investors new opportunities with potentially greater returns. Australia, for example, benefits from English language and its proximity to fast-growing Asian economies. It has seen its student housing sector expand rapidly in the last decade. The shortage of quality accommodation there has kept vacancy rates extremely low and forced up rents.

Continental Europe is a highly diverse market, but gaining investor attention. This is particularly the case as more institutions offer courses in English, at significantly lower cost to students than their US or UK counterparts. Student housing markets in Germany, France and the Netherlands are all at an early stage of development with very limited quantities of purpose-built student housing provision, particularly in relation to growing overseas student numbers. Consequently, they offer a wealth of opportunity to early entrants – although each market poses its own unique conditions and challenges.

While institutional investors have dominated cross border investment to date, accounting for 57% of deals by volume, they have been drawn primarily to mature markets. We expect private wealth to come to the fore in the countries where student housing is still an emerging sector. Private investment into cross-border student housing already accounts for a 39% of all investment in the sector globally (which is a higher rate than private-wealth local investment), and is poised to drive expansion in new territories.

At the same time, we see more potential for growth in indirect investment vehicles as established markets mature further. We anticipate that indirect entry to the sector, via private funds, syndicates and REITS will become increasingly important to the UK market, for example. Further maturation of the market is to be expected as more entry points to the sector will broaden investor activity.

The direct entry model will remain important, particularly in newer markets where the development of a building is needed prior to investment or where a large number of educational institutions are seeking to upgrade their existing stock. Public-private partnerships (such as nomination agreements), joint ventures with an owner operator or master-lease schemes are all routes into markets where student housing is still dominated by university ownership.

We believe there is significant potential for the student housing sector to grow as a global asset class. Annual investment into the US student housing market is now at $2.6bn on average. This market is still yet to fully mature but, based on its size in relation to student numbers, we foresee the major emerging student housing markets of the Netherlands, France and Germany combined eventually being worth three quarters of a billion dollars per annum within the next 20 years.

Taken from
Spotlight: World Student Housing 2014