Global student accommodation
Student accommodation has become a global asset class in its own right. The three main factors driving the growth of global student accommodation are:
- the increase in the global mobility of students;
- global operator appetite is emerging, as key management platforms seek to generate international student accommodation brands; and
- global investor appetite is growing with institutions seeking to diversify portfolios outside of the US and the UK, and this phenomenon is an example of how they are seeking investment in real assets.
While the demand for purpose-built student accommodation in Australia is rising, the Australian student accommodation market is immature in comparison to the market in the US and the UK.
The key barrier to entry in the Australian market is the viability of student accommodation development against other land uses. With student and residential developments often having the same location requirements, student accommodation developers are regularly outbid due to the strength of the residential markets. This in turn has the effect of slowing the institutionalisation of the asset class and we do not expect to see many transactions in the Australian market in the short term.
As a contrast, the UK student accommodation market has seen unprecedented investment activity in 2015, totalling £3.8bn in the first six months, 2.1 times the total volumes in 2014. This activity has been dominated by large portfolio transactions, the majority of which have been taken up by international equity. Foreign investors continue to be attracted to the sector’s continued annual rental growth, but also the forecasted growth in student numbers.
The rising number of students in Australia, in particular international students, is having a direct impact on the demand for affordable student accommodation.
International student visa holders in Australia for 2014 totalled 453,500, accounting for students from 191 countries, with the majority from China1. This represents a 10.4% increase over the number of international student visas granted in 20132. The majority of student visa holders held a Higher Education visa, that is students studying a bachelor degree, associate degree, higher education diploma, graduate certificate and graduate diploma or Masters by coursework, followed by student visa holders who held a Vocational Education and Training visa3.
Foreign students provide a valuable source of revenue for universities and offering potential students accommodation in close proximity to the university or college campus, in a secure and safe environment is a top priority for educational institution. Specialist private operators are entering the market to offer purpose-built student accommodation, providing an alternative to on-campus accommodation but with the same management control and all-inclusive set-up as compared with students finding accommodation in the private residential rental market.
Given that the number of student visas issued each year is increasing and the relatively low corresponding number of purpose-built student accommodation beds available, there are significant opportunities for this investment class to continue to grow in Australia, and for off-shore Asian based investors to take advantage of this.
What is purpose-built student accommodation (PBSA)?
The growth of the PBSA market has given students who cannot access university Halls of Residence choice. The PBSA options offer higher quality accommodation, rents inclusive of bills, varying options on tenancy lengths, a branded product, enhanced internet connectivity, professional management and security. Preferred development sites are within easy access to one or more universities or private colleges, with good access to transport and amenities.
The range of PBSA offerings is growing. Student accommodation may be in the form of self-contained studio apartments with kitchenettes, charged at a premium weekly rent. Alternatively, students can rent an en-suite or non en-suite bedroom and share communal kitchen and living facilities with two to eight people, for a more affordable rent, Successful PBSA schemes will have a mix of bedroom types to accommodate a wide range of student budgets.
Of growing importance in the student accommodation sector is that of effective branding and marketing, whereby students are viewed as highly sophisticated consumers. Added value opportunities are also observed in providing a highly specified product and providing amenities such as common rooms and entertainment areas to drive rental value.
Models for delivering student accommodation
There are four main models for delivering student accommodation:
- Management only providers – student accommodation providers partner with universities or private developers to provide marketing and operational management services at new or existing facilities.
- Build, own, operate transfer (BOOT) – student accommodation providers partner with universities or other educational institutions on a long term lease to build, own and operate the student accommodation. At the end of the term (typically about 35 years), the facility is returned to the university. Depending on the terms of the BOOT Agreement, the services of the student accommodation provider can include managing the facility, marketing and leasing the units and maintaining and renovating the facility. A characteristic of the student accommodation market in the UK in 2013 was the university lease which appealed to institutions, due to the security of income flow underpinned by the covenant of the University. UK funds such as L&G became the market leaders in acquiring and securing such termed ‘income strip’ deals in this year.
- Develop, strata and management – student accommodation is developed and the lots are strata subdivided. The units are sold to individual investors on the basis that they may only be used for student accommodation and are leased to the student accommodation operator. This model is declining in popularity due to difficulties in financing the purchase of such units and a smaller pool of potential buyers when the owner wants to re-sell the asset.
- Wholly integrated providers – providers who develop, own and manage the student accommodation properties themselves. Such providers generally buy sites on land near to education institutions with good access to public transport and amenities and are responsible for developing purpose-built off-campus accommodation, marketing and managing the property themselves. As highlighted by the examples below, there has been an increase in the number of institutional investors partnering with experienced student accommodation operators to develop, own and manage student accommodation in recent years. In the last decade, the UK has been dominated by owner/operator to owner/operator transactions. We expect this pattern to continue in Australia as current players in the market scale up their portfolios.
Role of the operator
Without a student accommodation platform in place, an owner will usually enter into a Management Agreement with an established operator. At present, there are only a small handful of operators of scale in the Australian market.
The precise scope, terms and duration of the Management Agreement will depend on the individual agreements but the following functions are generally performed by the student accommodation operator in return for a monthly service fee:
- assisting with the commissioning and set-up of the student accommodation facility prior to it opening;
- arranging marketing and letting campaigns;
- entering into tenancy agreements with students and collecting revenue;
- providing or procuring operating and maintenance services, including cleaning common areas and waste removal;
- arranging for payment of all utilities, rates, security costs, repairs, insurances, cleaning and waste removal;
- reporting obligations and attendance at regular meetings with the owner of the facility.
With the globalisation of the student accommodation sector, we expect there to be increased competition from operators in the UK and the US who aim to create a global platform.
Considerations for Australian student accommodation
Zoning and Use Considerations
Developers must pay careful attention to the permissible uses in a particular zone and the applicable planning standards and criteria that apply at a site as purpose-built student accommodation is a relatively new development category in Australia and planning instruments frequently do not recognise it as a stand-alone category of use for planning purposes.
For example, under the New South Wales Standard Instrument – Principal Local Environmental Plan (upon which the majority of New South Wales local environmental plans are based), student accommodation is not separately defined but falls generally within the definition of “boarding house”, which is traditionally associated with low-cost housing in Australia. Accordingly, student accommodation developments in New South Wales will currently fall under the planning standards and development criteria for boarding houses, which are found in State Environmental Planning Policy (Affordable Rental Housing) 2009, despite the fact that most recent purpose-built student accommodation has been targeted at the higher end of the student accommodation market.
In other states, notably Queensland, there is strong support for student accommodation especially within close proximity to the Brisbane CBD. Under the new Brisbane City Plan 2014, a clear distinction between the definition of multiple dwelling and rooming accommodation has been drawn. The City Plan 2014 also introduced a separate code, the Rooming Accommodation Code, to assess rooming accommodation and where compliant, development will be self-assessable and not be subject to Council assessment.
Local councils are also starting to recognise the value of increasing student accommodation supply and are introducing incentives to facilitate this.
For example, in February 2015, the Brisbane Lord Mayor announced an 80% reduction on infrastructure charges if developers build student accommodation in certain areas of Brisbane, including within four kilometres of the Brisbane CBD. The reduction will apply to development applications that take effect between 1 July 2014 and 30 June 2017.
Developments eligible for the reduction must substantially commence building work within two years of the development approval taking effect and the development must also commence operation within a specified period. The student accommodation developments must contain a minimum of 20 bedrooms, include an active onsite management regime and be operated and managed by a bona fide and experienced tertiary or higher education student accommodation provider.
Recent notable transactions
Recent transactions within the Australian student accommodation market include:
- Government Investment Corporation of Singapore (GIC) and Macquarie Capital – In January 2014, these parties entered into a joint venture agreement to buy a majority interest in Iglu, a wholly integrated provider of student accommodation, that holds purpose-built student accommodation comprising over 900 beds in Chatswood, Sydney CBD and Brisbane CBD, with further plans to expand. In April 2015, Iglu purchased a prime development site in Melbourne for close to $20 million.
- AGP and Scape Student Living - In January 2015 the Netherlands based pension fund asset manager and UK based company, formed a joint venture with an initial commitment of $220 million to develop and manager student accommodation across Sydney, Melbourne, Brisbane, Canberra and Adelaide. The joint venture has so far acquired two development sites in Melbourne with a goal to deliver 1,500 beds by 2018, and is targeting the luxury student accommodation market, based on similar Scape projects in the UK.
- Unilodge - As the first transaction of an operational direct let asset, Unilodge have bought three assets in Melbourne previously owned by the YMCA. They now have 4,000 beds in Melbourne. The pricing has not been published but it will be a good indication of the market yield for direct let assets.
- Marquette Properties – Have recently lodged a development application for a 39 Storey tower in the heart of Brisbane CBD for student accommodation. The purpose built student accommodation tower will be one of the largest in the city with a proposed 753 rooms. This application follows an approval for the refurbishment of an existing office tower to be converted to student accommodation yielding approximately 650 beds.
With the UK and the US markets having matured considerably over the last decade, we expect large players in those markets to attempt to reap the rewards of the supply gap and higher returns in Australia. Only 1 in 7 students in Sydney can currently access purpose built accommodation, while in London this ratio falls to 1 in 4. Yields in the UK have hardened in the past 12 months, with prime London direct let yields now at circa 4.75%. Whilst there has been little evidence in the Australian market, we would expect yield of circa 7% in prime Sydney and Melbourne.
We expect the future of the global student market to be characterised by competition amongst large operators to become the first truly global student accommodation brand. We fully expect this investment class to continue to grow in Australia and provide opportunities for both domestic and offshore investors. While we believe the institutionalisation of the sector will be restricted in the short to medium term due to certain barriers to entry, the weight of capital chasing opportunities indicates a very positive growth story ahead.
Emily Fell (Knight Frank)