The student accommodation market in Germany is not as mature and institutionalised as it is in the UK, but the market is developing and offers opportunities. Matthias Pink explains

Student accommodation has become an established niche investment market in Germany. This is unsurprising, since over the past 10 years the number of students in Germany has increased by some 18% to over 2.1m.

In view of the suspension of national and civilian service, and two student age groups leaving upper secondary schools in certain federal states, a further increase in student numbers is expected. There are some 181,000 places in publicly funded halls of residence available to students - leaving almost 2m potential tenants on the open residential market.

However, there are shortages in many cities. While building additional student halls would certainly relieve pressure on student accommodation, this is evidently not in line with the needs of those concerned. According to Germany's higher education information system (HIS), only 10% of all students cite student halls as a first choice, with 81% preferring a rented apartment. That only 67% of those surveyed actually live in a rented apartment underlines the latent potential for private investors.

Student apartments are an attractive market segment for investors. While they are more management-intensive compared with ‘normal' residential property owing to the higher tenant turnover, the income is constant and the yields achievable for the investor are likely to be higher on account of the limited competition.

In addition, the target group can be clearly located. There are 180 university locations in Germany, with only 51 cities accommodating more than 10,000 students. These 51 locations were examined by Savills Research regarding their attractiveness as an investment location for student apartments. It is immediately apparent that there is a very wide variation of conditions in these locations. Consequently, each macro location analysed has been given a specific risk profile with the corresponding yield prospects. To date, the data available in this respect has been limited and greater transparency is certainly desirable from the investor's perspective.

In order to evaluate and compare the attractiveness of the 51 student cities, a benchmarking analysis was applied. Nine indicators were selected to reflect both the supply and demand for student accommodation. Four of these indicators relate to the status quo of a location, while the other five reflect the market dynamics.

In other words, the scoring model reflects the attractiveness of the locations analysed, as well as an evaluation of their development prospects. Based upon the values determined for the four status quo and five market dynamic indicators, a status quo and dynamic score between one and 10 has been calculated for each city analysed. Low values denote a high investment risk, while high scores indicate that the conditions for investment in student apartments in the city suggest a low risk compared with the other cities analysed.

The average of the status quo and dynamics score for each city analysed produces an overall score. Darmstadt (8.2) achieved the highest score in terms of its current locational qualities and its future development, and therefore shows the lowest macro-locational investment risk of all 51 locations analysed. In second and third places are Munich (8.2) and Hamburg (8). The lowest overall scores were recorded by Halle (Saale) (3.3), Braunschweig (3.4) and Magdeburg (3.6).

Apart from the powerful economic centres of Munich, Hamburg and Frankfurt, smaller cities such as Darmstadt and Karlsruhe also present attractive conditions for investments in student apartments. However, the locations with low scores may also provide profitable investment opportunities for investors. The higher investment risk means higher yield prospects that should, above all, appeal to opportunistic investors. This is particularly true where such investors have local market knowledge.

The analysis of the locations with regard to the status quo and dynamics enables the locations to be divided into four different risk groups. Cities showing above-average scores for both the status quo and dynamics are the classic core markets with low macro-locational risk. Those locations where one of the two scores is above average and the other is below average, will be of interest to opportunistic investors. The investor is likely to reason that with a high status quo and low dynamics score, the dynamics of the location are sufficiently high to suggest that conditions will also be comparatively attractive. The objective here will be to identify a property that will be unaffected, or barely affected, by the relatively unfavourable development of the macro location.

In the reverse case - low status quo and high dynamics score - the objective will be to invest in a property that benefits the greatest from the above-average development of the location. As a rule, when conditions in the macro location are unfavourable, the selection of the micro location and the property will be more significant.

The markets in the fourth risk category show below-average status quo as well as market dynamics scores. These locations could be characterised as ‘black swans'. The probability that an investment in such markets will result in a favourable exit scenario is, in view of current conditions and foreseeable developments, markedly low. If this does occur, however, the potential returns are, in turn, very high.

The comparative evaluation of the selected macro locations reveals that the 51 locations analysed have very different yield-to-risk profiles. Consequently, the student apartment market should offer investment opportunities for both opportunistic and more risk-averse investors. However, the student apartment is certainly not a ‘core' product for the majority of investors due to its specific nature. This is exacerbated by the small size of the market segment and, consequently, its low liquidity.

Assuming that every student in Germany living in a rented apartment occupies on average 25sq.m., this produces a total student apartment stock of some 35sq.m. This equates to approximately one tenth of the total office stock in Germany. On the other hand, the investment volume in student apartments is comparatively low which, in turn, improves resale prospects. For investors taking a long-term view with the appropriate know-how, the stable cash flow is definitely a selling point.

Until now, only a small number of investors in Germany have focused on this sector. But growing interest can be attributed to the fact that funding short-falls means the state is unlikely to build new halls of residence in order to relieve the shortage of student accommodation. As this situation is unlikely to change much, the involvement of private investors will be favourably looked upon.

Matthias Pink is head of research at Savills Germany