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Student Housing 🏠👨🎓
Owen
January 17, 2025
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Welcome to Alternate Universe!
In today’s edition:
Is student accommodation an investment opportunity? 🤔
Job opportunities at recently funded European startups 👇
Pelosi v Cramer - we have a winner 🥊
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The Crux 🔴
What 🧐
Securing student accommodation is often one of the biggest hassles for university students. Where you live impacts your commute, social circle, overall lifestyle, and even your mental health.
Students generally have three main accommodation options:
University-Owned Halls – Convenient and often close to campus, but the most sought-after and limited.
Private Rentals – This can range from a single room in a shared house (HMO) to a full studio apartment. While shared spaces can be fun, they usually lack the facilities of other options.
Purpose-Built Student Accommodation (PBSA) – Operated by private companies, PBSAs offer amenities like gyms, workspaces, security, and flexible rental agreements, but typically come at a premium.
In this article, we’ll dive into PBSA investments in Europe, a rapidly growing and attractive real estate market segment.
The European PBSA market differs significantly from the US:
Distribution: In the US, PBSAs are often clustered around large campuses, frequently in smaller towns. In Europe, they are more integrated into major cities.
Affordable Tuition: European higher education is relatively affordable, sometimes even free, making it accessible to international students. In contrast, the UK has seen rising tuition fees, especially post-Brexit.
Immigration Policies: Favorable post-study work visas in Europe attract international students, enhancing the demand for PBSA.
Because of these differences, insights from the US market don’t always apply to Europe.
Market 💹
The European student housing market is shaped by several interconnected factors: demographics, immigration policies, university rankings, and tuition fees. Together, these elements determine the demand for PBSA.
The primary driver of demand is the student population, influenced by:
Local Demographics: Birth rates and population growth directly affect the number of local students entering higher education.
International Students: Immigration policies and post-graduation opportunities significantly impact the influx of international students. Countries with supportive policies, like France’s Bienvenue en France initiative, have successfully attracted foreign students.
In the UK, Brexit led to a decline in European students. However, this decline is expected to be offset by the growth in non-EU international students and a stable local student base, ensuring continued demand for PBSA.
Europe remains a global hub for quality education:
In the latest QS World University Rankings, half of the top 10 institutions are in Europe, compared to 4 in the US and 1 in Singapore.
High rankings enhance Europe’s appeal to international students, especially from countries where access to elite education is limited.
Unlike the US, where higher education is often prohibitively expensive, Europe offers relatively low-cost or even free tuition, making it accessible to a broader audience, including international students. This affordability makes Europe particularly attractive for students seeking high-quality education without incurring excessive debt.
The supply of PBSA in Europe is influenced by two key factors: investment volumes and interest rates.
Like the broader real estate market, PBSA is sensitive to high interest rates. Rising rates increase borrowing costs, making it more challenging for developers to secure financing and service debt obligations. This can delay or reduce the development of new projects.
Over the past decade, investment in PBSA grew significantly, reflecting strong demand and investor confidence. However, 2023 saw a dip due to the high interest rate environment. Encouragingly, early data from Q1 2024 indicates a rebound in investment activity, signaling renewed momentum in the sector.
The European PBSA market remains highly fragmented, with most operators focusing on domestic portfolios. Unite Group, the largest player in Europe, currently operates 70,000 beds across its properties.
Other operators, while smaller, are expanding aggressively in response to chronic undersupply and growing student populations. Private equity firms like Blackstone and KKR have increasingly targeted PBSA assets, betting on strong fundamentals and a favorable long-term outlook.
Attractiveness ✨
Portfolio Diversification
PBSA offers diversification benefits with less correlation to traditional real estate. CBRE Index data shows PBSA delivered 7.7% total returns in the year ending September 2023, compared to -11.1% for the UK Monthly Index tracking all commercial property. This stability highlights PBSA’s resilience in challenging market conditions.Chronic Undersupply
The European PBSA market faces a significant supply shortage. According to JLL data, the key European markets had 2.2m beds available, which only caters to 1 out of every 7 students, equivalent to a provision rate of 14%. At the moment, the risk of oversupply is unwarranted. Over the last decade, the top 5 countries, added 48k beds, whilst the student population grew at 5x the rate. Nonetheless, the provision rate varies widely across different European markets - from 3% in Portugal to 36% in Denmark.Resilience to Economic Cycles
Unlike retail or office spaces, PBSA thrives during economic downturns. Education demand often increases as individuals seek to enhance qualifications, ensuring stable occupancy.Passive Investment Opportunities
PBSA provides hands-off investing, with property management firms handling operations, maintenance, and security, allowing investors to enjoy steady returns with minimal effort.
Risks ⛔
Limited Capital Appreciation
PBSA generally lacks the same potential for value appreciation as other real estate segments, such as residential or commercial properties. Its appeal is primarily driven by steady cash flows.Policy Sensitivity
Political decisions around immigration can significantly impact demand for student accommodation. For instance, student visa numbers fell 5.5% in 2023 in the UK compared to the previous year, partly due to tighter immigration rules post-Brexit.Financing Constraints
Mortgage options for PBSA investments are limited, making transactions heavily reliant on cash or private financing.Ethical Concerns
Investing in student housing raises ethical questions, particularly as rising rents often outpace student support grants. A UK report found that private PBSA rents outside London frequently exceed the maximum maintenance grant, straining student budgets. However, this varies across markets; in some European countries, PBSA can be more affordable than other private rental options.
Investment Implications 🤑
The most hassle-free way to get direct exposure is through investment in public student accommodation REITs. The list is notably short - Unite Group and Empiric in the UK and Xior with a pan-European portfolio. The combination of diverse portfolio coupled with the headwinds in the UK market, make XIOR a potentially more appealing opportunity.
Investing directly in student properties can be lucrative but requires significant time, expertise, and capital. Properties should ideally be located near universities, fully managed, and equipped with amenities like Wi-Fi and security to attract tenants and ensure strong rental yields. Local market rates need careful assessment, as demand and returns vary widely across regions.
For a more hands-off approach, startups like Amber, which raised $20M to provide transparent student accommodation comparisons globally, and Housr, a UK-based competitor, offer innovative solutions in this space. Additionally, investors with holdings in companies like CBRE or JLL may already have indirect exposure to the student housing sector, as these real estate firms specialize in managing and developing such properties.
Dig Deeper ⛏️
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Headhunted 🦅
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Interestingness📔
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As always, the financial disclaimer!
This is not investment advice. I am not a financial advisor. Make sure to conduct your thorough research before purchasing or selling financial products.