[+] Investors Backing Student Beds in Downturn

Student accommodation is luring real estate investors with the promise of recession-proof returns, according to industry. 

Australian Unity’s executive general manager for social infrastructure, Ryan Banting, says purpose-built student-accommodation assets are having a renaissance.

Banting says investors are looking for risk-return premiums that are no longer available in traditional commercial real estate asset classes. 

This increases the attraction of PBSA assets, the returns from which are uncorrelated to the traditional economic factors that spearhead demand for commercial real estate, such as discretionary spending and white-collar employment.

“Increasingly, investors both here and overseas are looking to sectors like PBSA that have strong user demand and positive macro-economic tailwinds,” Banting says.

He concedes any new supply in the PBSA sector is likely to be constrained by continued inflationary pressures on construction materials and labour.

The Australian Unity Student Accommodation Fund owns the Lady Lamington building at Brisbane’s Herston Quarter, on behalf of third-party equity and debt investors. The project kicked off in February 2020 in the midst of the pandemic with the redevelopment of the old nurses quarters on the site. It’s now operational student accommodation that is home to around 500 students, with capacity for 700 beds.

▲ The historic Lady Lamington building at Brisbane’s Herston.

With the return of students to Australia’s tertiary institutions just days away, demand for student accommodation has never been higher. The sector has recently been buoyed by an announcement from the Chinese government that it will return to its pre-Covid stance of only recognising qualifications that have been earned face-to-face.

This is prompting more students from China to return to in-person learning in Australia, driving demand for local purpose-built student accommodation (PBSA).

It’s a huge turnaround from the dark days of Covid, when university halls emptied and overseas students returned home. But for some time, major property developers and asset owners have been de-mothballing properties and gearing up for a return to normal market conditions for their PBSA assets.

“Renewed demand for university accommodation is driving high occupancy and room rates and growing investor support, resulting in higher capital values,” Banting says.

Kyrillos Mansour, who runs First Brick Property Buyers Agency, expects demand for properties in the PBSA sector to be driven not just by a return to pre-Covid enrolment numbers, but by diversification in the international student cohort.

“Before COVID, 30 per cent of all international students were from China or India. Recent visa applications show significant increases from emerging Asian economies such as Thailand and Indonesia as well as from South America.”

In terms of return on investment and risk profile, as with other commercial property sectors, there has been yield compression in the PBSA market over the past five years.

“This has been driven by global investor demand, sector scale and high development activity, especially for quality products,” Mansour says. He notes returns from local assets are higher than in other markets.

“In Australia, yields are sitting at around 6 per cent, down from 8 per cent in 2013.” 

This compares with average returns of 3.5 per cent in London and 3 per cent in Paris.

It’s believed over the past five years, more than 30,000 PBSA beds have been built in Australia, worth $9 billion.

Local and offshore money behind PBSA

Against this backdrop, a number of offshore institutional investors are lifting their exposure to the PBSA sector. These include Ivanhoe Cambridge, Brookfield Property Partners, GIC and Blackstone, through Scape.

The PBSA market is funded by a mix of private and institutional capital. Fund-through structures are popular, where the developer pays a coupon throughout the construction period. There is also traditional bank debt funding and funding via debt capital markets.

Although, some local investors appear lukewarm about this asset class.

“We are seeing a retraction from the major banks across commercial real estate. The majors will consider funding assets once student accommodation provides an interest coverage ratio higher than 1.5 per cent for a minimum of two years,” says Anthony Ferraro, managing director of commercial property development firm Salvest.

Also expect to see growing interest from domestic superannuation funds as they look to diversify away from traditional assets such as office and retail property.

Major players

Australian Unity aside, Scape, which owns about $7 billion in accommodation assets, is one of the most active developers in this space. It’s building about 6000 beds and already has properties dotted all over the country, with 16,000 apartments and 33 operating buildings.

Scape chief executive Anouk Darling is also the inaugural president of The Student Accommodation Council, a new division within the Property Council of Australia. She says the Australian PBSA market is unique.

▲ AXA partnered with Scape Australia to build its local purpose-built student-accommodation portfolio.

“Our assets are really close to universities, which means they’re in prime, CBD locations because our universities tend to be in cities, rather than in the country, which is common in countries such as the UK, for instance Oxford.

“Since borders have opened, and now with the news from China around mandatory face-to- face learning, there’s a massive surge in demand for beds. We should be full very shortly.”

Then there’s Cedar Pacific, which owns properties in Adelaide and Melbourne, recently acquiring an existing 400-bed facility in central Adelaide for domestic and foreign students for about $50 million. This building is leased to the University of Adelaide. Cedar Pacific is also building two high-rises for student accommodation in the Melbourne CBD, which will house 1300 beds when completed. 

In early 2022, Cedar Pacific opened one of the world’s tallest purpose-built student-accommodation buildings in Melbourne, operated by UniLodge. This property joins its existing 3000-plus bed PBSA portfolio of properties at Carlton, Footscray, North Melbourne and the Melbourne CBD and South Bank in Brisbane, as well as four properties New Zealand.

Yugo has recently opened one of Adelaide’s tallest student accommodation buildings, with 725 beds, a development that cost around $110 million.

Singapore wealth fund GIC is another major player in the PBSA market. GIC recently acquired a property on Anzac Parade in Sydney’s East, where a 1100-bed development is set to be built across the road from the University of NSW’s Kensington campus.

What’s next?

With increasing demand and undersupply, the PBSA sector is well-positioned to record further increases in occupancy and room rates. This, coupled with growing institutional investor appetite, will put pressure on investment yields and capital values, driven by tightly held supply and the low weighted average cost of capital available to such institutional investors.

The sector has a big future.

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