Investing in Tomorrow’s Minds

In the United States and the United Kingdom, student housing has long become an established asset class in its own right. Lately, though, international investors have sought to expand their horizon, and started checking out attractive opportunities in mainland Europe. Figures by Savills suggest that the total transaction volume for student halls of residence in Europe rose by nearly 81 percent annually over the past five years. According to Real Capital Analytics, the investment volume of the first semester of 2012 actually doubled year on year, totalling approximately one billion euros. That said, commitments in this asset class need to consider the specific nature of the properties in addition to the national differences in the life styles of young people.

Take Germany, for instance: The country’s total enrolment figures have more than doubled since the early 1990s. Over 2.7 million students were enrolled in German universities by 2012. There are several reasons to explain the growth: For one thing, knowledge is considered Germany’s only indigenous raw material, and taking out a degree is increasingly attractive not just for secondary-school graduates but also for active professionals. At the same time, Germany has a high catch-up potential in student enrolment compared to other countries. When comparing age cohorts internationally, only 20 percent of Germany’s young are enrolled in a degree program, much less than the European average.

While the student population may have more than doubled since 1992, the development of student housing has not been able to match the pace. In fact, the number of dormitories has dropped. The dorm ratio (meaning the relation of the number of students to available dorm units), which stood at 13 percent in 1992, declined to barely eight percent in 2012. The problem is: Accommodations in student halls of residence were hard to come by even in 1992. This means that the existing gap between supply and demand has since widened into a gulf. If the 13-percent ratio of 1992 was to be restored for the present student population, you would have to create around 135,000 new dorm units, or, differently put, 540 dorms of 250 units each.

The only solution for improving the housing situation for students is to raise new structures – and this is true not just for Germany. Experts of Savills, for instance, found that in England 66,000 multi-unit apartment buildings currently occupied by students could become available for the conventional housing market if more student accommodations were created.

Developers and investors must not lose sight of the fact, though, that student housing differs from classic apartment blocks. For one thing, there is the location factor – campus, shopping venues, and the inner city are all supposed to be within easy reach. Secondly, students have different expectations in the property fit-out than residential tenants. In addition to a fully furnished student-standard flat with dedicated shower room, you need to create common-part areas for joint studying or leisure activities.

There are differences in management, too. A comparatively high churn rate, for instance, means that student halls of residence need to be professionally managed. In Germany, two models dominate the market segment: One involves a facility manager or administrator who handles the commercial and technical management of the property. Facility managers of this type tend to sign service contracts over five-year terms with the option to renew the contract. However, the owner remains responsible for the property itself along with its upkeep and its furnishings. Under the other model, student halls of residence are managed as classic operator real estate on a lease over 15 to 20 years. The letting risk and the responsibility for property, furnishings and upkeep all transfer to the leaseholder.

In general, operator real estate, where the actual leaseholder is responsible for a property’s rental income, is deemed comparatively risky. Yet the risk associable with student flats is lower than that of other classic operator real estate, such as hotels or cinemas. This is explained not least by the alternative use options for which these properties qualify. Assuming a given property is no longer to be used as student hall after a certain number of years, it could be converted into senior-living apartments, a boarding house for business travellers, or even into offices.

The author is managing director of Mondial Kapitalanlagegesellschaft mbH