The US has led the way in the private, purpose-built, student housing market since its emergence in the early 1990s. The sector was developed in response to outdated on-campus accommodation, coupled with growing demand from domestic and international students seeking superior living space.

University-owned halls of residence, primarily for first year undergraduates (typically shared rooms in older buildings) still account for the bulk of the US purpose-built student housing market, but more recently built stock has departed significantly from this model. The expansion of the private student accommodation sector has seen an increase in higher-quality, single student rooms in purpose-built residences, both on and off campus. These have often been delivered in partnership with universities but bear the hallmark of a new era. Although targeted at all students, these schemes rent at a price premium to their earlier university-provided counterparts. The premium is justified by higher quality accommodation and a wide range of amenities that can include fitness centres, games rooms and ‘resort style’ swimming pools.

At a US level, 12% of students live in college housing or other purpose built accommodation, according to the American Community Survey. Of the remainder, 25% live in other private accommodation (rented houses of multiple occupation, for example), and 63% live with parents or relatives. The latter reflects the high propensity for domestic student to study at a ‘home’ university.

The north east US has the highest levels of purpose built student housing (college or private), led by Vermont (34%) and Washington DC (33%). Although California has the highest number of students residing in purpose built accommodation, by proportion, it has among the lowest (just 6% of all students live in purpose built units). Given that the state is home to the highest number of Times Top 400 institutions in the country (12 colleges with more than 300,000 students between them), this would suggest that the California market still has significant growth potential.

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New supply has been growing fastest in Arizona – a market that has been historically under served but is now offering more significant opportunities for investors, and accommodation for its students.

The popularity of the US higher education sector among international students has been fundamental to the expansion of the student accommodation sector in the country, in terms of both size and quality. The US has by far the most high-quality institutions (as ranked by the Times World University rankings). The US contained 109 of the top 400 world universities in 2013/14, or 27% of the world total. (The UK is in second place by number – though far more per head of population – with 49 institutions or 12% of the total in the top 400).

The strong reputation of the US higher education sector coupled with tuition in English remains a major draw to students from across the globe. This is in spite of the extremely high tuition fees in the US, which vary between $11,000 – $63,000 per year for international students.

Asians account for the bulk of international students in the US, mainly originating from China (29%). Other major source countries are India (12%), South Korea (9%), Saudi Arabia (6%), and closer to home, Canada (4%). Different nationalities favour different disciplines; the Chinese are most likely to study business, while those from India tend to favour engineering, for example.

The number of students overall has been growing in the US, increasing 11% between 2001 and 2011, with the number of international students increasing at an even faster rate: 19% over the same period.

US investment sector

Investment in US student housing fell during the global recession, but volumes recovered quickly and by 2013 investment reached nearly $3bn, 22% above 2007 volumes (Graph 3). In common with other asset classes in the US, domestic investors dominate, and inward cross border investment represents only a small portion of the market, just 2% in 2012, rising to 6% in 2013.

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Private investors, chiefly developers and owner-operators dominate the US purpose built student housing market but dedicated student real estate investment trusts (REITs) have grown rapidly. Their growth in importance in the US market reflects the maturity of the sector and its ability to attract money from the realm of indirect investment.

Student REITs were the dominant purchaser in the US market, purchasing $2.3bn of assets in the 24 months to Q1 2014, the vast majority by American Campus Communities (see bottom of page). By contrast, the major sellers over the period were developer / owner / operators, who sold more than $2.5bn of assets over the same period, among the top 20.

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The major US REITs reported weaker performance in 2013 (Graph 5), the result of concern among investors over rising tuition fees and the worry that, in turn, there would be a tendency for students to seek out cheaper accommodation. While few of these concerns have been borne out in reality, this is a good example of how investor sentiment can turn indirect markets, regardless of occupancy and returns in the real world or the capability of operators to ameliorate the effects through management.

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As such, it is an example of one of the drawbacks of REITs and other similar vehicles over direct investment. This is an especially important consideration in view of the perhaps counter-cyclical characteristics of direct student housing investment and its potential use as a portfolio diversifier from equities and bonds.

Talk of tapering and a generally strong equities market has caused bond yields to start moving outwards. This can also affect other income-producing investments, including REITs, and may therefore start suppressing capital values of this type of student housing vehicle in advance of capital value suppression in direct property.

With interest rate rises generally on the horizon, this is perceived as a potential headwind in direct property generally and in the student housing sector particularly – because of its relatively small investor base.

Additional worries have been generated by the possible impact of technology in education. As more institutions offer online courses, the need to live by or on campus is reduced (see p22), and this is being perceived as another risk to the sector. Nonetheless, student housing REITs are likely to outperform the rest of the market in the next year, because of recovery from possible current underpricing and a recent resurgence in investor demand for income-producing equities.

American Campus Communities

The largest and most active of US student housing REITs is American Campus Communities. Established in 1993, American Campus Communities launched the first student housing REIT to become publicly traded, in 2004, and today manages 145 properties with more than 92,000 beds.

Average occupancy across its wholly-owned properties stood at 97% in 2013 and goes a long way to explaining its attraction as an income-producing and distribution vehicle.

In the 24 months to Q1 2014 American Campus Communities purchased over $2bn in assets, more than the rest of the top ten buyers active in the United States combined.

Taken from
Spotlight: World Student Housing 2014