RESIDENTIAL BRIEFING: UK sets standard for student housing sector

When it comes to student housing, a fast-growing asset class, the UK is in the lead and the rest of Europe will surely follow, an expert panel agreed at PropertyEU’s European Residential and Student Housing Investment Briefing in London this week.

Transaction values in the UK reached £6.5 bn (€8.4 bn) last years, more than double the US figure of $3 bn. ‘It is an extremely impressive figure, due to private equity funds and financial investors selling while traditional investors like pension funds did the buying, as well as foreign capital from the Middle East, Russia and the US,’ said Aleksander Obradovic, chief investment officer at Deutsche Real Estate Funds (DREF).

While the UK is a mature market, there is a higher return potential in mainland Europe. ‘Look at the fundamentals,’ said James Snaith of Investment, Student Housing at Savills. ‘In Germany and France there are over 40 cities with a student population above 20,000. In the UK there are 20 such cities. There is significant potential in Europe, and many of the lessons learnt in the UK about meeting students’ needs can be translated.’

Germany is the most obvious place to invest, as it is the second most-sought after country after the UK by foreign university students. It is fast-growing as the percentages of foreign students keep rising, thanks to the harmonisation of degrees and to the fact that tuition fees and living costs are significantly lower than in the UK.

In the last couple of years the sector has attracted local companies, but now ‘foreign investors are waking up to the opportunities, as they rightly believe that what has happened in the US and then the UK can be replicated in Germany,’ said Obradovic.

The potential is huge, as there is still a strong demand/supply imbalance: accommodation rates are currently 10% compared to 23% in the UK, and the market is dominated by semi-public student associations, while the private market is highly fragmented.

‘In Germany supply is concentrated in the lower price segment, but the high demand is actually in the mid-price segment, as there are many students with an above-average income,’ said Obradovic. ‘Sixty per cent of students would pay €300-500 a month, but there are very few sizeable professional players offering student apartments in that space.’

The main challenge is low stock availability and the difficulty of doing development, as student housing competes with resi. On the other hand, the advantages of investing in student housing are stable cash flows, a low default risk, as market rents are ‘secured’ by parents and by state subsidies, inflation protection due to short lease periods, safe haven status, attractive yield spreads and supportive fundamentals.

What is needed is owner/operators with a fully integrated platform, said Obradovic, with a clear strategy and a proven model of value maximisation. ‘A strong management team on the ground is an essential component of a successful investment,’ he pointed out. ‘Non-professionals just worry about occupancy rates, without adding any products, but actually there is a real upside in selling services, which are much-needed and easily monetised.’