Student housing: Why Allianz has gone back to school
The market for student accommodation is booming, attracting record investment and new specialised entrants providing innovative solutions for a traditionally underserved demographic.
Investment has been underpinned by the low-yield environment, which has caused institutional investors to expand into riskier, more specialised assets capable of delivering better returns than traditional asset classes.
At Allianz, we identify global real estate trends and incorporate them into our investments. Given the strong sector fundamentals, student accommodation is a strategic priority and plays a crucial role in our growth. Our exposure is about €1.2bn across the US, Europe and Australia – this includes €800m invested this year. We aim to double that investment over the next two years.
The attraction of student accommodation is its cash-flow profile and high-yield potential. During periods of economic distress, the demand for student accommodation is largely unaffected, meaning that the cash-flow profile is uncorrelated to the general economy. Students might even prolong their studies before entering the job market, further increasing demand. Student accommodation can therefore insulate a portfolio from economic downturns.
The potential for higher yield can be attributed to the risk profiles of the assets. With high churn and the need for specialist asset management, student accommodation carries increased risk compared with other kinds of residential assets, allowing investors to command a higher yield on their capital. This risk is rooted in unique characteristics that operators and investors must consider.
The first characteristic is the very short tenancies, which leads to a high churn rate. Operators must have adequate staff and expertise to fill vacancies quickly and avoid excessive void time. A related consideration is that tenants are likely to be very vocal about the quality of assets, sharing their views of both asset quality and level of service with fellow students. Given this level of transparency, sub-standard assets or poor service will quickly generate a bad reputation among prospective tenants, making it difficult to fill vacancies.
Students also have very distinct preferences and requirements in the assets themselves. The size of rooms is less important than in other residential assets, whereas being close to the university, quality of nightlife, and facilities such as common rooms or gyms is more important.
It is critical that investors consider these unique characteristics which, for Allianz, is centred on high-quality assets, partnering with best-in-class operators and leveraging our scale as an investor.
The first element of our approach is to invest in prime assets. We believe that to effectively manage the risk involved, it is important to develop assets that offer market-leading service as well as prime, city-centre locations. We always prioritise quality over scale in potential portfolios.
The next element to our investment approach is to work with best-in-class operators. Its unique characteristics make student accommodation a labour-intensive asset. We therefore always work with leading specialist operators who share our philosophy and have extensive experience of managing purpose-built student accommodation.
This year we partnered with Scape, a leading provider of purpose-built student accommodation to establish a fund investing in Australia. Scape Australia’s developer/operator model is vertically integrated to oversee all aspects of deal sourcing, design and build, development, project, asset and investment management.
The final strand to Allianz’ investment approach is to leverage our scale. Given the supportive fundamentals behind the sector, competition between investors is starting to put pressure on yields. A major advantage of Allianz is our scale, which allows us to invest in large, high-quality portfolios that would be inaccessible to smaller investors. This year we invested £350m (€390m) in a partnership with Greystar, the global rental housing leader, alongside Canadian pension provider PSP to grow Greystar’s Chapter portfolio, London’s premier student accommodation brand.
The positive cash-flow profile and yield potential of student accommodation has driven record investment in recent years. In today’s busy market, it is more important than ever to understand the risks involved and invest accordingly.
Olivier Téran, CIO, Allianz Real Estate