Student Accommodation Sector Investment

In a recent blog, we considered the tightening of yields for retail property, brought about by the low interest rate environment, share market volatility and weakness in the resources sector. 5% yields are very much in play in boutique retail sector transactions and we have highlighted the need for thorough due diligence, the importance of looking beyond return and identifying value-add opportunities ahead of purchase of such properties, however well-located they may be.

We have also highlighted the fact smart money has a strong focus on the health sector – hospitals, day treatment facilities and the like – and on office properties with government and education-provider tenants. In this blog, we consider the emergence of student accommodation as an asset class that may offer opportunities for developers and investors.

The potential presented by the worldwide market for overseas education is significant, and the sector is Australia’s largest services export and its third largest export after iron and coal. Organisation for Economic Cooperation and Development research indicates that, worldwide, the number of students undertaking tertiary education outside their homelands rose by 50% from 2005 to more than four million in 2013.

While Australia may be a relative newcomer to educating overseas students it, at present, captures somewhat more than 10% of worldwide activity and, in 2013, with 6.2% of total market share was eclipsed only by the United States (19.4%) and United Kingdom (10.3%). In that year, when 85.2% of our intake was from Asia, Australia hosted the third highest proportion of overseas students in its tertiary education system, ahead of the United Kingdom and behind Luxembourg.

Federal government Department of Education and Training statistics show that 498,155 overseas nationals were in Australia on study visas in 2015, up from almost 452,950 in 2014. The department also identifies that study-visa students in 2014-15 contributed $18.2 billion to Australia’s economy, a jump of 14.5% from the previous financial year.

The figures are impressive and, given Australia’s climate options and proximity to the major markets of south-east Asia, China, Korea and the Indian subcontinent, the opportunities for growth appear compelling.

Brisbane and the Gold Coast are the major centres for overseas students and, with the right government policies in place, it is likely that, over the longer term, Toowoomba, Sunshine Coast, Rockhampton, Townsville and Cairns can also benefit. However, to grow the market, we must be able to house overseas students and a new report by Savills – Australian Student Accommodation – indicates Australia is falling short in provision of purpose-built student accommodation.

The Savills report says that, while research indicates more than $2 billion has been earmarked for student accommodation projects since the start of 2015, increases in overseas student numbers, coupled with domestic student needs, will see demand significantly outpace supply. It says there are about 67,695 PBSA beds across Australia’s eight capital cities, seven of which have an existing supply of less than 12% per full-time student. The exception is Canberra with 27.8%.

Savills says the situation has seen a number of investors enter the market since the start of 2015. The top 10 providers own 15,498 beds and have a development pipeline that will provide a further 14,205. The report says Brisbane City Council has supported the development of student accommodation by slashing infrastructure levies and there are now 8,930 beds in the pipeline in the city.

While development, at present, appears to be dominated by players that aim to build and hold, it is likely other developers will take advantage of boutique opportunities and student accommodation buildings will be offered to the market as strata-title investment offerings – and as single-title properties to meet demand for investments in the up-to-$5 million price bracket.

Some time ago, we had an inclination to participate in the development of purpose-built student accommodation. At that time, we found significant variance in rental affordability between local and international students. Investment returns were, therefore, impacted by the proportion of overseas student occupancy. A high proportion of overseas students was required to obtain attractive investment returns.

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