Yield compression in mainstream property is turning attention to the benefits of student accommodation. Lydia Brissy and Eri Mitsostergiou report
Over the past four years global financial challenges have resulted in a ‘flight to quality' among property investors in Europe. Identifying core assets in prime core markets has been a priority; however, limited stock and high demand has compressed yields and made certain markets expensive. In addition, fundamentals for the traditional commercial sectors, such as offices and retail, are becoming more challenging as business and consumer confidence in the euro-zone drops and unemployment rises.
As a consequence niche markets have become popular with investors who have recognised the opportunities in them. A good example is the student housing sector, which in Europe is still considered niche, while in some countries, such as the UK, it is already an established alternative. Over the past three years student housing has attracted rising volumes of investment from funds across Western Europe. In 2011, according to RCA data, the volume of student housing transactions in Europe increased by almost 81% per annum, exceeding €1.4bn. In the first half of 2012 investment increased by 9% compared to H2 2011, from €900m to €1bn, and doubled in comparison with H1 2011, when the volume was recorded at €0.5bn.
Our analysis of the four major student housing markets in Europe (France, Spain, Italy and the Netherlands) demonstrates that the fundamentals of the student housing market are broadly counter-cyclical, with new student registrations rising when economic output is decreasing. The total number of student registrations increased by 5% in Spain, 4% in France and 9% in the Netherlands between 2008 and 2011, while in Italy the number of students has remained stable over the same period.
Demand for student housing varies from country to country and is linked to the extent that students remain dependent on their families. In family-centric cultures this share can be as high as 65%, in the example of Italy, or 33%, in the case of Spain, while it falls to 23% in France and below 15% in the Netherlands.
But the common key drivers of student housing demand in most countries are the foreign and intra-regional student populations. The number of foreign students in Europe is rising, especially in Western European universities, supported by rising demand for high-level education from Eastern European and Asian/Chinese students. Special cultural, geographical and language links of some countries with certain regions in the world further support this trend, such as the rising number of registrations from South American students in Spanish universities. During 2008-11, the number of foreign student registrations increased by 8% in France, 5% in Spain, 4% in Italy and by 18% in the Netherlands, caused by the introduction of more courses taught in English.
The most popular European universities among foreign students are in the UK, France and Germany, where 10% or more of their total student numbers consist of non-European students. And in Spain and Italy there is evidence that more universities are considering implementing English-language courses for foreign students.
Regarding the intra-regional population, we might start to see a tendency for students to study closer to home due to restricted family budgets. Nevertheless, demand from intra-regional students for student housing should maintain a significant share of the total demand, as student mobility remains significant in some markets - for example, in Italy, where intra-regional students account for 20% of total registrations.
Currently, the provision of student housing in the countries surveyed ranges from as low as 3% in Italy to 18% in the Netherlands, and stands at 11% in France and 6% in Spain. This is calculated as the ratio of total places in student halls over the total number of student registrations. Therefore the supply-demand imbalance in these markets presents an opportunity for investors and developers.
In each of the markets we analysed, the majority of student halls are in the hands of universities, regional authorities and religious institutions - ie, public institutions. In Holland, however, the majority of student housing is in the hands of social housing corporations, specialised student housing associations and private owners. In France and the Netherlands the governments have increased their student housing budgets to provide further student accommodation over the next four to eight years to help address the gap between supply and demand. However, do not expect similar initiatives from the more financially restricted public sectors in Italy and Spain, leaving opportunities for private investment initiatives in these markets.
Rents vary widely between markets and are determined by factors such as the type of hall (public or private), the city, local services and the duration of stay. Generally, rents are higher in the larger towns and university cities, while lower in the provinces. Prices can be quite competitive compared to open-market residential rents, especially in public student accommodation, while the private sector offers a number of services that are attractive to students and inclusive in the price.
Average prices per bed for the markets that we studied range from €648 per month in Paris to €443 per month in Milan. Evidence from the more developed markets of France and the Netherlands demonstrates that rents are rising in line with, or greater than, inflation - despite the economic downturn. In Spain competition from decreasing residential prices and lower disposable income has forced some student housing operators to lower rents.
Although the student residential sector represents a small proportion of the total investment turnover, it is nevertheless a sector with the potential to grow. Increasing demand, high occupancy rates, positive and counter-cyclical rental growth and the yield compression prospects explain investors' interest in this emerging alternative property investment opportunity. The market in Europe is still in the first stages of development, therefore evidence regarding yields remains sporadic and yields should remain relatively stable and attractive compared to other market sectors. Prime achievable yields are in the region of 7% in Italy and the Netherlands, 6.75% in Spain, while they can be as low as 5.5% in France for top-quality assets.
Student housing will attract investors looking for a sector less competitive than traditional commercial markets or for those diversifying. We believe the combination of a lack of supply combined with increasing demand, the expectation that yields will exceed that of other traditional residential and commercial real estate assets, and calculated risk will continue to attract global investors to this market.
Lydia Brissy and Eri Mitsostergiou are European research directors at Savills