CASHING IN ON STUDENT HOUSING
The shortage in student accommodation - locally and abroad - presents a sizeable opportunity for the property industry.
huge undersupply. Massive demand. You would think that investment into student accommodation would be a slam-dunk for property investment funds. But up to now, it’s been a hard sell. And it has a lot to do with the management intensity required for this sub-sector of the residential market.
But the pursuit of capital growth, yields and income in a tough economic environment requires a different tack. Now property developers and investors are exploring new asset classes and sub-sectors they might otherwise not have invested into. And they are recycling non-core assets that ordinarily they may have disposed of.
One of these new asset classes is the lucrative student accommodation market. And with an accommodation shortfall in South Africa of around 75% (according to figures from John Schooling, managing director of STAG African), it’s a sizeable opportunity for property developers and investors.
Residential yields, which were not as attractive as the retail and commercial sectors a few years ago, are now looking more appealing to listed property funds, especially when the expected yield from the student accommodation sub-sector is 10%. Not to be sniffed at given challenging local property fundamentals.
But it is a sub-sector of the residential market that requires skilled management capabilities – so it is not for the faint-hearted or inexperienced. Partnering then with those that have the expertise in this field is crucial for those dipping their toes into this potentially lucrative market.
“It’s a management-intensive and costsensitive business. This is a hotel-on-steroids business,” Andrew Konig, CEO of Redefine
Properties, tells finweek. The JSE-listed REIT’s exposure to student accommodation locally is only through its 51% holding in Respublica, a company that specialises in the development and management of student residences, currently numbering five. “We chose Respublica because it has a premium brand and we want to be associated with quality,” says Konig.
It’s a new asset class for Redefine and while still small, exposure is likely to increase. A number of Redefine’s non-essential assets are prime candidates for conversion into student housing, Konig says. Hence its joint venture with Respublica to revitalise Hatfield Square in the popular student hub of Pretoria, which will supply student accommodation for an additional 2 200 students. The next most likely candidate for conversion is the Absa Campus building near Wits University in Johannesburg.
Aside from quality of accommodation, one of the major drivers of demand is proximity to a university, says Konig. But timing of development to market is important. “If you don’t get your development completed by end December, you miss a whole intake. And if you complete mid-year, the residence stands empty for half the year.”
The student accommodation shortage is not a problem peculiar to SA. It is a global one. Unsurprisingly, Redefine’s foray into premium student accommodation has not been confined to local shores.
Once the company’s groundbreaking €1.2bn Polish deal kicks in, its offshore portfolio will grow from 20% to 25%. Of that, Australian investments will represent 36% of its offshore exposure.
Not unexpected then that Redefine has expanded its offshore student accommodation goals into known territory, where Konig says quality student accommodation is in dire shortage.
“In Australia, the provision of university tuition is Australia’s third biggest export, Konig tells finweek. “International students are welcomed and they pay top dollar.”
Recently, the company invested AU$30m for the purchase of a car park a mere 200m from the university in Melbourne that it envisages will cost around AU$100m to redevelop into student accommodation. Konig says first-year yields of 10% are expected.
The slice of Redefine’s student accommodation might not be that meaningful; at only around R1bn compared to Redefine’s total asset value of R67.8bn. But with additional properties being recycled together with the Australian investment, that slice is set to increase.
Gearing for student accommodation
Not all property investment companies specifically develop accommodation for students. But they gear them in such a way as to provide for this lucrative market, especially when developing in a student catchment area.
Such is the case with Octodec Investments. The JSE-listed REIT focuses on Gauteng and is one of the larger property owners in the Pretoria CBD, where the company invests substantially in urban renewal; 30.2% of Octodec’s R11.8bn portfolio of 324 properties in Gauteng is residential.
“While not in the business specifically to provide accommodation for students, a third of our residential component – just under 10% of our entire portfolio – is accommodation rented by students.”
Of those 9000-odd residential units that cater to students, young professionals and families working in Gauteng’s CBDs, 3 000 of those provide accommodation for students, Octodec’s financial director
Anthony Stein tells finweek. “While not in the business specifically to provide accommodation for students, a third of our residential component – just under 10% of our entire portfolio – is accommodation rented by students.” And to manage this management-intensive residential market Octodec has partnered with asset management specialists City Property.
Take The Fields, Octodec’s mixed-use development in Pretoria’s student capital Hatfield, which includes plenty of retail space and a student study centre. Here the rental of a bachelor pad with tight security would set students back R4 750 a month. The situation is similar at Steyn’s Place, also in Pretoria, where the 380 bachelor, one-bed and twobed units are mostly occupied by students.
Yet, not all property entities are looking to invest into student accommodation and some who have already invested into this residential sub-sector are even disposing of their interests. JSE-listed capital-growth property fund Attacq recently disposed of its 30% interest in The Pavilion, a student residential accommodation property in Birmingham in the UK, for R34.9m.
Student accommodation as a value driver is not only attracting large investment funds. Private investors are just as keen to invest. And it can turn into a bidding war between buy-to-let investors, eager parents desperate to secure accommodation for their offspring, and young professionals all vying for high-demand properties located in student catchment areas.
Ubuntu House is the newest addition to the residences at Stellenbosch University’s Tygerberg campus.
Octodec’s development, The Fields, in Hatfield, Pretoria, includes retail space and a student study centre.
STAG African student accommodation development