Money&investing
There is undoubtedly a mismatch between demand and supply of decent purpose-built student accommodation
5% and 20% in the fund while Feenstra is locked in for up to three years.
Muchanya expects large pension funds and other institutional investors to also get on board over time, but says it typically takes 18 to 24 months to raise capital from the latter.
Howard Penny
Why student housing, and why now? Muchanya says Growthpoint’s entry into this niche sector supports its fund management approach to create investment products that are not yet readily available. In addition, he notes that “beds and sheds” — the residential and industrial/logistics property sectors — are outperforming their office and retail counterparts globally.
That’s also true for SA, he says, given the country’s shortage of purpose-built student accommodation amid strong demand.
What’s more, the SA industry is relatively fragmented, which offers potential to create scale through the consolidation of existing portfolios.
There’s also huge scope to develop new stock. The construction of three new developments is already under way, and a fourth is set to start later this year.
The pipeline, near Wits
University, the University of Cape Town and the University of Pretoria, will add about 3,000 beds, valued at about R1bn, to Growthpoint’s seed portfolio.
Muchanya says that in the SA context, student housing also ticks the social impact investment boxes, given its higher education, employment and economic spin-offs. A key incentive for investors is the government’s support of the sector through its National Student Financial Aid Scheme (NSFAS) to provide funding for low-income students. In fact, 60% of students renting a bed in the Growthpoint student portfolio are NSFAS funded. The scheme’s monthly accommodation allocations, which are administered by the individual universities, typically vary from R4,000-R6,000 a student.
The returns forecasts for Growthpoint’s student Reit certainly seem compelling too.
The fund is targeting a total annual return of 15%-17% and an initial dividend yield of 9%-10%. That’s based on gearing of about 35% and rental growth expectations of 5%-6% a year. Notwithstanding limited on-campus classes last year, five of the seven buildings in the portfolio had a high occupancy rate of between 94% and 99%, while the two remaining buildings were at between 85% and 90%.
The student housing sector is not without risk. This is especially so in light of the pandemic, which could lead to lower demand on the back of a longer-term shift to home-based online learning. However, Muchanya argues that this is an unlikely short-term scenario, as the majority of NSFAS-supported students don’t have adequate access to infrastructure and a conducive study environment at home. Also, non-NSFAS students whose parents can afford private accommodation are likely to continue to prefer the independence of living and studying away from home, he says.
Of course, there is also the risk that NSFAS could default or reduce the number of students it funds. But Muchanya believes the government is likely to continue prioritising education and NSFAS spending, to avoid any potential repeat of the FeesMustFall movement.
Howard Penny, research analyst at Anchor Stockbrokers, says student housing as an asset class is getting more traction, not only globally but also in SA, where there is “undoubtedly a mismatch between demand and supply of decent purpose-built student accommodation”. He says: “The challenge is to create the right product at the right price point.”
A recent report by real estate advisory firm JLL estimates that SA will need an estimated additional 84,000 student beds by 2025.
At the moment, specialist student accommodation providers that offer lodgings close to higher learning institutions in the R4,000-plus per month bracket are believed to own fewer than 60,000 beds between them. These include South Point, which is the biggest player, with a portfolio of 12,730 beds, Respublica, Pulse, CampusKey and Citiq.