The strong investment returns that have been made from UK student halls over the past ten years show the attractiveness of this asset class. But it is now the turn of mainland Europe to provide the best opportunities. In our view, student halls should be incorporated into any pan-European residential investment strategy.
Student halls have several impressive characteristics: returns are less cyclical than for most commercial property; vacancy rates tend to be minimal, in contrast to levels of up to 20% for many weaker retail and office locations; rents are also not prone to the dramatic fluctuations commonplace in many other parts of commercial property, such as offices; and they face fewer structural challenges, too, such as the threat that online sales pose to the retail sector.
Because of this combination of structural and cyclical reasons, UK student hall funds have delivered returns over the past decade that are not only better but also less volatile than the wider commercial property sector.
We think the main investible student hall market is worth as much as €40 billion in the UK.
But although the UK has historically been the main investible student hall market – we think it is worth as much as €40 billion, more than double the rest of Europe together – other markets are now more enticing.
This is partly because the UK is much less alluring than before. Higher education enrolment has been fairly flat over the past eight years, according to Savills. The potential for growth in student numbers in the coming years looks limited too. Fees are high: domestic students pay more than £9,000 a year, and overseas students pay above £20,000 per annum, according to Eurostat. And there is uncertainty about whether the number of students from the EU will drop once the UK leaves the EU. In addition, potential growth in rents paid per student is limited, because rents are already so high – especially in London. For these reasons, future return prospects in the UK look their weakest in 15 years.
At the same time, though, prospects look good in several continental European markets – particularly Germany and the Netherlands. According to the same figures from Savills World Research, enrolment in higher education has risen by more than 35% in Germany and by more than 20% in the Netherlands over the past eight years, in contrast to the stagnation in the UK. Despite the particularly sharp increase in Germany, there is still more room for further rises with German and Dutch universities successfully drawing in more international students by offering English-speaking courses. This is important as international students are more likely to live in halls.
Course fees in Germany and the Netherlands are also low, for international as well as domestic students, and accommodation costs are reasonable too. Taking a combination of fees, accommodation charges and living costs, Berlin is the second cheapest place for an international student to be (out of the 23 cities analysed by Savills), beaten only by Shanghai. Munich is fourth cheapest, and Amsterdam is firmly in the lower half of the table.
There are, however, many traps for the unwary, even in national European markets that look good. Because the sector is still in its infancy as an investible sector in continental Europe, the track record of funds and accommodation providers is short. Investors also need to understand the idiosyncrasies of particular markets. In Spain, students expect food to be provided in hall; in Germany, going to the expense of building a gym is a bad idea – students want a no-frills offering because their priority generally is the lowest rent possible.
But the risks of investing in student halls can be mitigated, through the right choices. The accommodation should be handily situated near campuses: investors must think not just about location, but about micro-location. Universities with higher reputations are safer bets, because their student numbers will be hit less severely by national and international downturns.
The student hall sector in Europe should not be considered in isolation from the wider residential sector. In many countries, there is often a strong overlap between the demand for and supply of general residential property and for student halls. The strong demand for private rented residential in Europe’s major cities, combined with constrained supply, also applies to student halls. We prefer stock in cities marked by strong residential demand and supply constraints. Investors can even take advantage of this by investing in hybrid products that serve both students and the wider public – a commitment that straddles two sectors helps to hedge bets. In the Netherlands, International Campus is developing Little Manhattan – an Amsterdam project that offers a third of its 869 studios to young professionals.
Investors should also be minded to plump for high-quality, purpose-built property. Opting for high-quality assets will reduce the high gross-to-net ratio that characterises student accommodation, since maintenance costs are lower.
Investors who take these tips to heart – concentrating on good property in strong locations in promising countries – stand a high chance of making a success in the student hall market.
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