Europe's property market remains challenging as many property values continue to fall and financing conditions remain tough. However, one asset class is bucking the trend to deliver strong rental growth. Student housing - which has been largely ignored by most investors until now - is attracting the eye of investors keen to find an asset class that seems relatively immune to cyclical downturns affecting other property asset classes, including offices.

Europe's property market remains challenging as many property values continue to fall and financing conditions remain tough. However, one asset class is bucking the trend to deliver strong rental growth. Student housing - which has been largely ignored by most investors until now - is attracting the eye of investors keen to find an asset class that seems relatively immune to cyclical downturns affecting other property asset classes, including offices.

Governmental drives to encourage more young people into university education in many European countries, including the UK and Germany, are also underpinning strong demand for student housing. Subsequently, university student numbers are soaring. There were around 18.78 million students in tertiary education in EU-27 countries in 2006, up 18.1% on 15.9 million in 2000, according to Eurostat, the statistical agency of the European Communities. In the UK, student numbers have rocketed to 2.3 million today, up from just one million in 1990. The UK government has set the aim of having 50% of all young people in tertiary education by 2010, up from 43% in 2006.

In Continental Europe, it is a similar story, with 2.2 million students in tertiary education in Germany in 2006 compared with around 2.2 million in France and 1.8 million in Spain, according to Eurostat. And the returns can be very attractive. Earlier this year, Cordea Savills' Student Hall Fund was named the UK's top performing property fund during 2007, delivering a return of 20.2%, according to property index provider IPD's Pooled Property Funds Indices. As such, the fund performed far better than the IPD All Balanced Funds Index - where funds invest in a wide-range of property types - which reported average total returns last year of -5.2%.

While there has been a slight softening in the sector this year, its counter-cyclical nature suggests that returns will still be positive this year, said Patrick Carr, portfolio manager of Cordea Savills' Student Hall Fund. 'We have a strong presence in regional cities but we are now turning our attention to cities such as London and Edinburgh, which are likely to benefit from rental growth this year of at least 4.5% to 5%. We are currently looking at a couple of opportunities in Edinburgh,' he added.

Cordea Savills would like to grow the £200 mln fund by £50 to £100 mln this year, subject to both investor interest and finding the right opportunities. Student accommodation in Cordea Savills' portfolio includes rooms with ensuite bathrooms and self-contained studio apartments. Rooms are typically small, at around 12 square meters, although studio apartments are larger, at around 18 square meters. Rents in regional cities range from around £75 to £90 a week for a room and up to £140 a week for a studio apartment, Carr said.

However, there is still a scant supply of good student housing in most European markets, including the UK, Germany and Spain, making it ripe for development. And there are some sizeable developments underway. Private equity firm Blackstone Group opened its flagship student housing block with 1,045 single and twin rooms in King's Cross, London, in September last year.

Blackstone has created a company called Nido - which means 'nest' in Spanish and Italian, - that will manage the block's day-to-day running, providing receptionists, cleaners and security. Blackstone now intends to roll out the scheme internationally. Its first scheme in Barcelona is due to open in 2010. The company is also eyeing Germany, France and Italy, according to Terence Treadwell, managing director of Nido in London

Unite PLC, one of the largest student housing developers in the UK, is working on a number of projects, including the conversion of a former office building in Woburn Place, London, into 500 single and twin single rooms. The scheme, which will cost around GBP 100 mln to develop, is expected to be completed by the end of the year, according to Unite's chief financial officer Joe Lister. The rooms, which range between 20 m2 and 35 m2 will cost between £300 and £400 per week. Typically, Unite rooms cost between £160 and £180 a week in London and up to £100 a week in regional cities, he said.

'We think that strong rental growth this year - of around 6% to 7% in London and 4% to 5% in regional cities - will insulate us a bit from the current problems in the market,' said Lister. Over in continental Europe, Germany is on the radar of a number of investors, due to its large student population and lack of modern student housing stock. Zurich-based property group Corestate has invested more than EUR1.2 bn in student housing in Germany since the end of 2006.

'Demand for student housing is growing very quickly and there is a real lack of good student housing close to universities, so we see a real gap in the market,' said Corestate chairman Ralph Winter. However, there are challenges associated with developing student housing, he said, including the difficulty of finding land in close proximity to universities, as such land is often government-owned.

Typically, student rooms operated by Corestate are around 20 square meters and cost about EUR100 a week, said Winter.

In January, Corestate acquired a 14.82% - or EUR 20mln - stake in German property group Alta Fides AG, which will invest EUR 750mln in student housing projects across Germany over the next five years. Last month (June), Corestate also raised EUR 486mln for its real estate private equity fund, Corestate German Residential Limited. Corestate is hoping to grow the fund - which invests directly and indirectly in German residential properties - to EUR 2bn, with 75% leverage.

Cordea Savills is also mulling the possibility of launching a pan-European student housing fund, with a core UK component, said Carr: 'We don't want to restrict ourselves to the UK. In continental Europe, we are interested in student housing in markets such as Germany, France and Spain. We might well launch such a fund within the next year,' he added.