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THINK US: Student housing – a sizeable and growing niche investment opportunity

THINK US Student Housing

In our latest research report ‘THINK US: Student housing’, we highlight how institutional interest and investment in the sector is growing, and totalled c.$9bn in 2016. We examine the favourable demographic trends, which underpin demand and strategies for success in the sector.

The report finds that Millennials, those born between 1981 and 1997, are pursuing college and post-graduate degrees in record numbers, creating a huge demand for student housing. These students are seeking custom-designed complexes, with private bedrooms and bathrooms, and high-end amenities like swimming pools, fitness centres and state-of-the-art internet connectivity. However, in the US, this type of stock represents the exception rather than the rule, as the majority of existing stock is older and located a significant distance from campus. Astute investors are looking for opportunities to capitalise on this supply/demand gap by investing in high-quality product close to campus, or by looking for opportunities to renovate older, well-located product.

Additionally, we report that further opportunity for investment exists due to state budget cuts. Higher education in the US is facing funding cuts in many states, with per student spending on higher education for 2015 remaining below that of 2008 in 47 states. This presents an opportunity for investors to provide on-campus housing stock that universities are unable to provide themselves.

According to our research, the sector is also less economically sensitive than the conventional apartment sector, which is driven largely by employment growth. By comparison, the student housing market does not experience a demand surge during boom times, in fact, post-secondary enrollment often declines modestly during economic recoveries as prospective students are attracted by plentiful employment opportunities.

Tom Park, Senior Director, Strategy & Research, comments: "Rental growth in the sector has proven to be less volatile than that of conventional apartments – partially as a result of the sector being less economically sensitive. Results for some of the largest players in the market show rental growth volatility, as indicated by the standard deviation, was lower than conventional apartments and capital expenditures are in line with those of conventional apartment."

The sector is, however, not without its risk, including students not paying their rent or damaging property, and the rising cost of tuition deterring students from attending university. However, we find that the former is mitigated by the need for parents or guardians to co-sign leases and provide damage deposits. In addition, we find that college costs are indeed rising but typically at a modest rate, especially for in-state students.

We highlight the two largest investors in the sector, American Campus Communities (ACC) and Education Realty (EdR), collectively have only an estimated 2.1% market share in top university markets, suggesting there is significant investment opportunities in the sector. Additionally, REITs' investments and targeted investments are largely located just off-campus, with ACC’s and EDR’s portfolios having a median distance to campus of just 0.1 miles. While proximity has advantages, it often comes at a cost for renters. For many students, more affordable accommodation in relative proximity to campus (e.g., within 1-2 miles) is an acceptable trade-off. Properties located further from campus can still generate attractive rental rates and occupancies. Lastly, both ACC and EdR are heavily reliant on development and do not always compete directly for acquisitions of existing product. Notably, REITs accounted for only 5% of acquisitions volumes in 2016, compared to 38% for institutions.

  

Download the full report THINK US Student Housing 

Issued by Henderson Real Estate Asset Management Limited, 201 Bishopsgate, EC2M 3BN. Authorised and regulated by the Financial Conduct Authority. TH Real Estate is a name under which Henderson Real Estate Asset Management Limited provides investment products and services.

Tom Park

Thomas Park

Senior Director, Research & Strategy, Americas

Thomas's biography