Rapid wealth creation in emerging economies has led to a surge of globally mobile students seeking quality education overseas and, in turn, a place to stay.

For many host countries, the purpose-built student housing sector has consequently become established as a highly-investible asset class. At the same time, recessionary conditions in Western markets have led to a surge in domestic student numbers, driving the need for student accommodation at home and further boosting demand for accommodation. This has helped to make student housing performance less cyclical than some other property asset classes, providing investors with stable income flows, low voids and a solid demand base.

Growing demand is set alongside very low levels of supply in many markets, making student housing a secure and appealing investment. While it was considered a fringe, alternative investment class just two decades ago, student housing is now firmly established in the UK and US and the sector now has increasing appeal to institutional investors who are actively participating in the market.

Performance in the sector has low correlation to the traditional real estate asset classes, so it has proved particularly effective in diversifying property portfolios. Institutional investors, with traditional investor-operators, pushed global investment volumes to new highs in 2015, exceeding anything seen before.

^{▲ Bespoke student housing is a highly investible asset class}

Investment hierarchy

The US student housing market is the world’s most mature, with several student housing REITs publicly traded. The US market is supported by a huge higher education population (totalling 20.6m) and its position as the number one destination for foreign students. Reflecting this maturity, some investors now see the sector as more fully priced than newer markets. This has slowed recent activity and led to a decline in investment volumes since 2012.

The UK is the world’s next most mature market, having seen huge expansion in the last decade and coming into its own during the global financial crisis. The UK’s first student housing REIT was listed on the London Stock Exchange in 2014.

Many of the student housing markets in major European countries are still in their infancy, but at various stages of development and representing significant untapped potential for those willing to help nurture them. Investment has been pioneered by local players, but the international market is taking note.

The Netherlands, arguably the most ‘Anglophile’ in its education offer (more courses are provided in English here than in any other non-English speaking market) has seen among the highest levels of new investment in recent years. Developers have successfully adapted the UK and US model for this market making it a highly investible proposition.

In the German market, early investors have found success by offering a premium product to compete against the affordable not for profit (Studentenwerk) product. The premium approach has also worked in key Spanish cities, differentiating against an affordable private rented sector. Victoria Hall were early entrants in Spain and Germany. In the most investible student cities of France, notably Paris, sites are in short supply and accommodation supply is limited, which has put downward pressure on yields.

Beyond Europe, Australia is another emerging market for the sector. On Asia’s doorstep, it offers English language tuition and an enviable quality of life. Investors have focused on the biggest of the Australian student cities, Sydney, Melbourne and Brisbane, where some landmark deals were undertaken in the last year.

UK market comes of age

The student population of the UK is 2.3m; less than one-ninth that of the US but the big story of the last 18 months has been record levels of investment in the UK market, which exceeded US investment volumes for the first time. Focusing on big-ticket deals (US$7.5m+) and excluding land sales, over $6.5bn of investment was seen in the UK student housing market in the first three quarters of 2015, compared to just over $3bn in the USA over the same period (see Figure 1).

^{Source: RCA}

Private equity funds and finance companies are selling their assets and mainstream investors, insurance companies, pension funds and investment banks are buying. This is a sure sign that the sector has matured.

The launch of the UK’s most recent student REIT, the Empiric Student Property Fund, listed on the London Stock Exchange in June 2014, is testament to the maturity of the UK market. It brought with it a slew of new acquisitions, with deals in Liverpool, Durham and Lancaster.

Other active players include the non-listed Unite UK Student Accommodation Fund, which acquired 2,100 beds from Ahli United Bank, and US-based Greystar on behalf of Goldman Sachs, which purchased 13 properties from Oaktree-backed Knightsbridge Student Housing.

It is no surprise that the top deals globally in 2015 have all been in the UK, but driven by foreign investment (Figure 2). Reflecting the maturity of the UK market, the major transactions have all been portfolio deals.

^{Source: Savills World Research}

This foreign investment has been led by money from North America, the Middle East and Russia. Increased investment activity has brought with it yield compression. This has particularly been the case for investments in prime London where net initial yields on direct-let properties are now around 5%, suggesting that expectations of rental growth as well as planning and supply constraints are higher in the UK than in the US.

We expect global competition for UK stock, coupled with limited opportunities, will lead to further yield compression in the near term.

US investment volumes fall

The US student housing market has seen investment volumes decline from their 2012 peak of just under $4bn. Investors showed caution following a dip in enrolment numbers in 2013, cuts to federal student aid and a shrinking 18-24 demographic. Compared to the UK, and particularly to European markets, some core US markets are fully supplied with quality products, leading some investors to believe the sector now appears fully priced, with seemingly limited opportunities for rental growth.

The major US student housing REITs have underperformed the S&P500 and investment volumes are down by 30% in the past year. This comes in part as the largest of these, American Campus Communities (ACC), funds its future growth by disposing of older assets and focuses on those closest to campuses. In the past 24 months, ACC has disposed of $577.7 million of assets, mainly to existing players, and acquired $433million, according to Real Capital Analytics. Competition from other funds has also forced the major student REITs to consolidate and streamline their operations.

Domestic investors dominate the US market, with negligible cross border investment. Rather, North American investors are seeking opportunities in markets overseas and are the largest foreign investor in the UK student sector, accounting for 80% all cross-border deals in 12 months to September 2015.

International investment in mainland Europe

Having realised their gains in the UK, the entrepreneurs and pioneers of the student sector in the UK are now turning their attentions elsewhere. Student housing in mainland Europe is emerging as a highly investible proposition, and investment volumes are rising.

The Netherlands has seen average annual investment of $200m in the last three years. The majority of this investment has been private, domestic capital, but foreign investment is growing.

Big ticket deals in 2014 included a €150m ($165m) agreement between German-based International Campus and Dutch student housing association DUWO for five new student housing schemes. The Student Hotel secured €150m in funding from Perella Weinberg Real Estate and a further €100m from Dutch pension fund manager APG to expand its model across the Netherlands and beyond. Interest from national and international investors has contributed to yields contracting 25 basis points from 5.75% to 5.5%.

In France, growing investor interest combined with the limited available supply on the market has put downward pressure on prime student yields, which stand at 5.4%. Investment volumes remain small, with recent peaks recorded in 2010 and 2013. Domestic investors accounted for 72% of all acquisitions in the past three years. The balance came from the Netherlands (16%), the UK (7%) and Germany (4%).

A Savills survey of key student cities in France found that between 60% and 70% of existing student housing stock belongs to private investors or occupiers in split ownership structure, which is less accessible to institutional investors and property companies. As a consequence, investment activity is mainly driven by forward funding new schemes.

Germany, meanwhile, saw €220 million of investment in its student sector in 2014, more than twice the volume of the previous year. Some 90% of this was on developments yet to be completed. UK-based Crosslane were the first foreign player to enter the German market, while some domestic investors have been financed with international funds.

Spain has seen agreements reached by Knightsbridge Student Housing for the development of five new student halls of residence, focused on Madrid and Barcelona. At the end of March 2015, The Student Hotel (headquartered in Amsterdam) purchased two Barcelona student halls of residence leased under a long-term agreement to the operator Melon District for a total of around €41.5 million.

^{Source: Savills World Research}

Investment opportunities

In the US, opportunities remain in the consolidation of portfolios and upgrading of existing stock, but the flow of capital out of North America suggests greater potential overseas. The recent large-scale institutional investment activity in the UK market is testament to the maturity of the sector in that country, where opportunities remain, but both markets are now much further along the investment curve. For potentially greater returns, pioneering investors are targeting mainland Europe and Australia.

Purpose-built student housing provision is generally low (see Comparing The Major Markets), particularly in relation to growing numbers of international students who demand one-stop, quality accommodation. But these markets are highly diverse and require understanding at the local level.

New development and investment in these markets has been led by local players, while institutional investors have been drawn to mature markets. Those pioneering foreign markets have already cut their teeth in the UK – notably Knightsbridge Student Housing, and Crosslane’s Prime Student Living.

The direct entry model will remain important, and there is a role for private wealth in countries where student housing is still a nascent investment class. Local partners will also prove valuable, when navigating local legislation, market nuances and planning systems, or providing local management platforms.

Indirect investment vehicles (private funds and REITs) are already coming of age in the UK, and we may expect to see expansion of these into mainland European markets over the next decade.

Importantly, investment choices must not be made at a national level. Investor focus needs to be concentrated on cities themselves and their higher education institutions in particular. Different locations can have very different prospects within the same country.