[+] Student Accommodation Shortfalls Dragging on Housing Crisis Recovery

Analysts think we could be looking over a cliff edge as demand for student accommodation remains unmet. A series of reports from CBRE and KPMG has highlighted the extent of the problem, with CBRE’s research finding that 8000 purpose-built student accommodation (PBSA) rooms will be delivered across Australia between 2023 and 2026. While this may be a 7 per cent uplift, it is far less than individual global cities, such as Paris, which is expecting 18,000 rooms, and London with a projected 15,000 rooms for the same period. In fact, Australia is “deeply under-penetrated” with just one PBSA bed for every 16 students compared to nearly one bed for every two students in markets such as the UK. With the expected return of large numbers of international students and domestic students back on campuses, the situation, like that in housing in general, is becoming critical. “Supply is of course the larger question,” says chief executive of student accommodation operator UniLodge Tomas Johnsson. “We can’t open the papers without hearing about that problem. The whole government, the whole industry, is focused on it, and as a result, a lot of energy, a lot of resources and a lot of funding is shifting into the space. “That is very positive, and it also provides an opportunity for us.” ▲ Australia now has three universities in the top 20 for 2024 rankings, demonstrating the improving quality of education in Australia, says Darling. Chief executive of Scape Anouk Darling says that education is Australia’s fourth largest export, and the performance of its universities in global rankings would always make it attractive to international students. “Every year, our top universities are jumping in the world rankings, demonstrating the improving quality of education available to students in Australia. “[But] we're entering a period where we are already experiencing, and going to continue to have, a structural undersupply of PBSA to accommodate the rapid return of and growth in student demand. “In Brisbane, we currently have significant waiting lists and we’ve had significant rental increases, now withstanding the Brisbane City Council have increased rates upwards of 200per cent. “We have universities asking us whether we can set aside a certain number of beds for their students because their accommodation has become exhausted. “From a supply side, we saw a few buildings come online during Covid, but supply moving forward is heavily muted.” PBSA in context CBRE’s Pacific head of research Sameer Chopra says that the situation has come about due to multiple factors, some quantifiable and others cultural. “Volumes dropped in terms of enrolments but they’ve come shooting back. The issue is that the pace of student recovery has been a lot stronger than expected. “The other thing which is really hard to measure is a social change where, 20 or 30 years ago, [domestic] students might have been happy to stay at home and go to the local uni, but now even domestic students want their independence—they want to go out and experience life and live with their friends. “My son is going to university in Sydney next year and has applied to to stay on campus, rather than being at home—he doesn’t need to, but they are saying they want the experience, and part of that is staying on campus.” ▲ Median rents for student studios grew from $406 per week to $530 per week between 2018-2023 in the Brisbane, Melbourne and Sydney markets, according to CBRE. Johnsson says that major changes to demographics and student preferences happened during Covid, but it was difficult to see which would stick and whether these trends would compound the problem. “We certainly saw a lot of the domestic uplift happening over the Covid period.There was much more interstate movement during Covid and moving away from home, there’s definitely a trend,” he says. “Whether that’s a lagging effect or a trend here to stay I couldn’t tell you—but there were other forces at play, including Covid in its own right.” Affordability is also a major issue, with private residential accommodation prices skyrocketing, making PBSA potentially a better option for students. “Accommodation [during Covid] was comparatively affordable compared to now. We didn't have the international students so rates were competitive in student accommodation. Now those international students are back and those Covid dynamics are no longer the case.” ▲ New market entrant LinkCity has launched Newcastle CBD plans marking its first foray into Australian PBSA. Student housing has absorbed a considerable amount of the returning visitors to Australia, KPMG urban economist Terry Rawnsley says, meaning that the increased population has not been funnelled fully into the private housing market. In fact, KPMG found that 20 per cent of new arrivals into the country are taking up existing capacity in “non-private homes”, mainly student accommodation but also worker accommodation. “We’ve kind of soaked up all the spare capacity that we did have, now it’s a case of if we want to have more then it’s up to developers to provide it themselves and work with the university sector to deliver that,” Rawnsley says. Changing landscape for the sector Student accommodation poses several problems not shared by the general residential sector, and these issues are being exacerbated by an increasingly tight rental market. Proximity to campus is key, which means there is little room to manoeuvre with location. Building layouts favour studio apartments or larger numbers of bedrooms and even co-living spaces, which means adaptive reuse of other buildings, be it offices or other residential buildings. Then, of course, is the ongoing problem of construction. “One of the biggest challenges is the higher cost of construction and where interest rates have moved to and their impacts on financing, and the combined impact of these on the feasibility of being able to develop and build more PBSA," says Scape's Anouk Darling. “We’ve seen unprecedented construction cost escalation over the Covid period, and while it’s starting to slow down a bit now, the market hasn’t yet fully caught up in terms of a correction downwards to land prices. “In Sydney there’s also the added impact that there just isn’t the same availability of sites in and around these university precincts.” ▲ New York alternative asset manager Blackstone spent $500 million on Student One in Brisbane, which controls three sites with around 2300 beds. CBRE’s Sameer Chopra says that while land might be available, it can cost 25 per cent more to build on it, and this could materially impact Australia’s intake of students in future. “Housing has almost become an impediment to attracting international students. “If they are coming from US or Canada for instance, it’s one of those things you want to tick off earlier on, so Australia might lose out in the short term.” However, despite these challenges, student accommodation in the longer term could take the pressure off the private residential market. “We need more of it coming through, and a bigger scale to absorb current demand,” says Chopra. A sign of more positive things to come is the influx of new entrants to the market, on the developer and funding side of things. “Investors tend to be from overseas, it’s the way their portfolios work out. In time domestic funders will come,” says Chopra. “But we’re getting a lot of interest from people kicking the tyres on the sector, not just around Sydney and Melbourne but away from that as well. You can build out in Macquarie Park, Parramatta or Carlton for instance, and there are a lot of other places where universities exist.” ▲ LinkCity and UniLodge teamed up to launch a Newcastle CBD location as developers and operators look outside Melbourne and Sydney. Recently, for instance, French construction firm Bouygues’s development arm Linkcity Australia entered the Australian student accommodation sector, filing plans for a $105-million, 19-storey mixed-use tower in Newcastle’s western suburbs , and Blackstone made its first investment in the Australian student housing market with the purchase of Student One in Brisbane last week. “But the constraining factors already mentioned will hamstring foreign investment into delivering future PBSA supply," says Scape's Anouk Darling. The downside compared to other areas of great potential, such as build-to-rent, is asset pricing. “Relative to build-to-rent, the pricing on these assets is a little bit wider,” says Chopra. “It’s cheaper, by almost 100 basis points. Cap rates in student accommodation are around the 2.25 level, multi-family is closer to 4 to 4.25. You’re getting it with slightly different or cheaper entry point, partly because build-to-rent is so new.” Land of opportunity While the outlook could appear bleak, there is reason for hope with major new projects in the works including the University of NSW’s partnership with Iglu to develop 1066 apartments opposite its Kensington campus and Wee Hur planning 411 beds to service the University of Sydney and University of Technology Sydney (UTS). In Queensland, Brookfield and Citiplan have plans for 935 beds near QUT, as well as 465 beds in Carlton close to the University of Melbourne, while Scape is planning a 465-bed PBSA project. Earlier this year Unilodge’s 46-storey Melbourne Central and its UniLodge Melbourne CBD tower were completed by Cedar Pacific, and Scape has plans for 10,000 apartments by 2030. “We hope this would contribute to alleviating pressure on the rental market,” says Darling. “We’re also continuing our growth in the PBSA space, both in our existing precincts as well as expanding into new growth markets, looking at opportunities near Macquarie University, Western Sydney University and Monash. “But we would like to see more regulatory and statutory support for this, similar to what build-to-rent is going through at the moment.” ▲ The Boulevard was Perth's first PBSA site, topping out in 2018, but there has been very little sector development since. CBRE's Chopra says there is a “tremendous” amount of room for growth, with only 100,000 student beds and 1.6 million students in Australia, and opportunities in unexpected places. “Perth is an interesting market, it’s very underpenetrated, there isn’t enough student accommodation there, and it has four universities with strong relationships to Singapore and Malaysia. “People tend to stay close to markets they know, you have to have construction relationships, you have to know local councils and the like, so it’s easier to focus over here. “But Perth has some of the lowest residential vacancies, and not a lot has been constructed in terms of real estate in the last decade, but the economy is doing really well, so there can be decent opportunities over there.” Clearly, there is appetite and support but this needs to translate through, says Johnsson. Councils are prioritising student accommodation and various state governments are trying to make it easier to make development so there's certainly plenty of goodwill in this affordable space. It’s a matter of translating that to genuine opportunities for development, that's the key issue in driving the supply side, he says. “The supply side is where our focus needs to stay.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Student Accommodation Shortfalls Dragging on Housing Crisis Recovery

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