At a time when the student population is rising by around 1.5 per cent each year in France - this figure including an increasing number of overseas students attracted by recent amendments to immigration laws and cheap tuition - the need for special housing has escalated substantially over the last five years.
France has now become one of the most desirable study destinations in the world according to a recent survey undertaken by Savills Estate Agents. At the same time, although the country’s capacity to house students has increased, it remains insufficient, meeting less than 15 per cent of students’ accommodation needs.
Although those currently investing in student accommodation are mostly investors dedicated to this particular asset class, when one considers the unprecedented mix of the scarcity of accommodation available and the increasing demand for it, combined with yields in the higher range of real estate investment (between 5.3 and 6.7 per cent, according to Savills), and the appetite for long-term revenue with low risk of borrowers defaulting (since students’ parents often act as guarantors and the French state grants large subsidies), it is likely that different types of investors, looking for diversification towards contra-cyclic products, will be attracted to the student accommodation market.
This class of real estate assets developed in France on the back of other previously regulated classes of assets such as hotels and residential units, which now exhibit serious drawbacks in terms of duration of leases, rent review or recovery of service charges. However, student accommodation is now regulated separately by the new ALUR (l’accès au logement et un urbanisme rénové) law of 24 March 2014 as falling within the category of university residences (résidences universitaires), and benefits from certain advantages in comparison with other classes of residential assets. The remainder of this article will examine those advantages.
More flexible lease term
Following the enactment of the ALUR law, student housing falls within the same category as residential units, provided the premises constitute the main residence of the occupier, whether the premises are furnished or not. The premises are deemed to be a main residence provided they are occupied for at least eight months of the year. This means that some of the measures intended to protect tenants in residential premises will apply. However, certain exceptions exist, such as provisions for the lease term to be as short as one day if the tenant is a student, instead of the mandatory minimum three-year term (or six years when the landlord is not a private individual). Furthermore the lease will not renew automatically and the landlord is entitled not to renew without cause, which provides a certain flexibility, for example, if the investor needs to use the summer holiday period to carry out refurbishments.
No cap on rent increases
Another exception arises if the premises are furnished and operated under a commercial lease (ie the owner of the property grants a lease to the operating company) and certain services are rendered to students. In this case the rents are not capped even where the premises are located in one of the zones designated by the ALUR law as being one in which the lack of properties available for rent is high and accordingly subject to a rent cap. This of course has the effect of netting higher returns for the investor.
Recovery of higher proportion of service charges
In the circumstances outlined above of an intermediary lease with services ancillary to it, the service charges are recoverable as a freely set lump sum and not capped to the costs effectively recoverable from tenants as set out under the ALUR law. However, the landlord must still ensure that the lump sum payable remains in line with the costs and expenses actually borne by the landlord.
Use of quotas relating to social housing
Most of the local planning schemes in France’s major cities impose construction quotas for social housing units in development projects involving residential premises. The letting of these units must be on conditions significantly more beneficial to the tenant. Since this quota is often up to 20 per cent of the residential development as a whole, these constraints can have a deterrent effect on developers and investors.
By inserting new provisions in the Construction Code, the ALUR law has provided that student houses may fall within the category of social housing, provided they are let to students from economically disadvantaged backgrounds. This means the development plan meets the criteria of social housing, allowing investors not only to overcome the initial challenge of having to develop social housing, but also giving them the opportunity to develop an alternative asset class within a less competitive and fast growing market.