A Bankable Asset: As lenders are showing, student housing remains a strong bet for uncertain times
14 February 2023
Despite the current challenges facing real estate, not all segments of the market are identical. As the economic repercussions of the COVID-19 crisis and the war in Ukraine are felt globally, driving inflation to 40-year highs, and interest rates to levels not seen since 2008, student housing continues to perform strongly.
With a robust investment thesis underpinned by positive supply and demand fundamentals, this resilient asset class delivers solid rental income and remains attractive to lenders looking for stability.
Student accommodation is largely uncorrelated to traditional financial markets, built on the solid foundation of global higher education, which has historically performed well through economic cycles. We saw this following the financial crises of 1987 and 1992, as well as the global financial crisis of 2008, where enrolment at US universities increased by 15 percent between 2007 and 2010. During the COVID-19 crisis, there was also an 8 percent year-on-year increase in students attending UK universities, as education remained a priority.
This focus on education across both the developed and developing world continues, with 228 million students globally. This number is forecast to grow to 265 million by 2030, according to RMIT University. Included in these figures, international student numbers are expected to increase to 8 million by 2030, 3 million more than in 2019.
While improved economic prospects provided by a university degree are a crucial factor in the sector’s growth and resilience, students also see higher education as a life choice. This reflects the fact that many students decided to stay in their accommodation while face-to-face teaching stopped during COVID-19, valuing the community experience of living and studying with their peers. And where students did return home, or were unable to return, such as in Australia, occupancy numbers have recovered to pre-pandemic levels significantly faster than anticipated.
Additionally, the sector is supported by strong demographics, the continued growth of the middle classes and governments globally driving their knowledge economies. These strong fundamentals are why high-quality purpose-built student housing remains popular with both students and lenders, alike.
Driving stable returns
Firms such as Global Student Accommodation (GSA) have witnessed first-hand the continued and growing appetite for higher education during the past 30 years. Over this time, supply-demand imbalance has increased in key markets.
This has been exacerbated by the COVID-19 crisis, which reduced the pipeline of new developments, while construction-cost inflation is now impacting supply further across all major markets. Added to this is the large proportion of first-generation stock that is no longer fit for purpose and is being removed from the market for refurbishment.
Recent figures released by Cushman & Wakefield in the United Kingdom reveal that 18,000 new beds were added to the market in 2022, but 11,000 were withdrawn for improvement works, leaving a net gain of just 7,000 across the country. This lack of supply, coupled with growing student numbers, is expected to result in a shortfall of 200,000 UK beds by 2027.
At the same time, student numbers have continued to grow, supporting strong occupancy levels across leading jurisdictions, which provides real comfort when lending on assets. For example, a recent Yardi Matrix report on the US student housing sector revealed that the 2022 preleasing period ended with 96.6 percent of bedrooms leased at 200 universities surveyed by the firm. Savills has echoed this in Europe, reporting high occupancy rates ranging from 95 percent to 98 percent across the continent.
Furthermore, student housing remains an effective inflation hedge through the ability to reprice rents annually while mitigating the ever-increasing risk of rising utility prices. This is obviously incredibly valuable in the current environment, giving lenders the increased certainty they need, while investors look to reallocate capital from other real estate sectors to take advantage of strong rental income.
Access to capital
Although each borrower and its circumstances are unique, GSA is seeing banks continuing to lend to student housing investors.
Lenders are very supportive of the sector, and borrowers with the appropriate track record and well-located properties remain attractive, with the ability to raise debt on favourable terms, even in times of stressed capital markets.
Lenders are forecasting that there will be some tightening of terms, including lower leverage levels, spreads moving out, narrowing strike rates for interest rate hedging, required amortisation and general tightening of all major covenant levels. The industry, however, is continuing to borrow new loans and refinancing maturing debt successfully. In 2022, GSA completed the financing and refinancing of 17 debt facilities in the amount of $1.2 billion (€1.36 billion), with leading banks across six markets.
As a specialist investor in the sector, firms such as GSA take a long-term view when it comes to appraising investment opportunities and building relationships with all major lenders around placing debt. They use their experience of the sector and local knowledge to focus on the acquisition of the right properties, in the right location, at the right time, and this has ensured the availability of debt during the past few quarters.
Looking ahead to 2023, a flight to quality can be anticipated. This could leave some assets and markets stranded if they do not have a good sponsor and sufficient equity to de-leverage their lending positions. This is where strong, established and experienced owners and operators will become increasingly important for lenders in the coming year.
This is not the first time the student housing sector has been through market volatility, and it will not be the last.
Thankfully, the fundamentals of student housing are still strong. What we are seeing is that, as banks seek to de-risk their balance sheets, specialist student housing managers remain an attractive proposition for lenders and investors who understand the true value of experience in the sector. v