European student housing deals rocket by 29% y-o-y

European student housing deals have rocketed by 29% y-o-y to €13.6b across the continent in 2017, according to Cushman & Wakefield’s latest Student Accommodation Guide, published this month.

‘It marks a new high,’ Andrew T. Smith, partner, student accommodation investment, at Cushman & Wakefield in London, told REFIRE. ‘The growth is being driven by the general sentiment of moving away from traditional assets, such as offices, towards operational real estate.’

There were €1.2bn of student housing/micro apartment deals in Germany last year, according to C&W. ‘So far this year, there have been around €450m of deals, so we could see a similar deal volume to last year, or even more,’ Smith said.

Student housing, once a niche asset class, now forms a key component of real estate investor allocations across the globe, according to the report. Increasing growing global demand for higher education, which is being driven by shifting demographics and wealth distribution, has propelled investors to seek out student accommodation investment across the risk spectrum and multiple geographies.

Germany leads the pack as the largest student population in Europe, with student numbers that have grown substantially relative to other countries over the past 10 years. The stable investment environment has encouraged a large amount of international capital looking to invest in the sector, with Brookfield, GIC, Allianz, BVK and Harrison Street all entering the market over the past 18 months.

‘We now live in a world where the student population is more internationally mobile, more flexible and ultimately has more choice about what and how to study,’ said Paddy Allen, a partner at C&W. ‘Due to the evolving nature of the sector across Europe and increasing capital allocation, investors must become more creative in how they invest to gain or increase exposure. The result is that customer demand for student accommodation shows no signs of abating any time soon.’

One investor upping its exposure to student housing in Germany and Austria is fund manager Union Investment. Earlier this month, it acquired ‘the Fizz Vienna’ micro housing complex on Helmut Zilk Park in Vienna for its Urban Living Nr. 1 special fund via a forward purchase agreement. The property will comprise over 195 apartments in one of Europe’s most popular university cities and is scheduled for completion in autumn 2019. The vendor is a joint venture between International Campus AG, CORAG and Kollitsch & Reichstamm. The purchase price has not been disclosed.

This acquisition takes the number of student apartments in the company’s Urban Living Nr. 1 special fund to 573. The fund focuses on Germany, Austria and the Netherlands, with plans to grow it further, Henrik von Bothmer, investment manager at Union Investment, told REFIRE.

‘The target volume of the Urban Living No. 1 fund is set to reach €500m and around 60% of this will be invested in Germany,’ he said. ‘This means that we are budgeting around €300m for Germany and €200m for Austria and the Netherlands.’

Union Investment is not only targeting ‘Top 7’ cities, von Bothmer stressed. ‘We’re not restricted to Top 5 or Top 10 cities. Rather, the development forecasts of the location as well as the respective micro- location must be convincing. We check this for each individual case. However, we do not only check the number of students but also like to invest in micro-apartment concepts with an orientation towards other target groups. These are, for example, people just starting their careers or commuters who are also looking for small apartments in urban locations. Our commitment extends to serviced apartment concepts with a minimum stay of one-to-three months and some additional services.’

Shifting development models

Ultimately, theomnipresent housing shortage is also affecting students, von Bothmer said. ‘The new modern concepts with single apartment with private bathroom and kitchenette offer students an attractive selection tailored to their needs. At the same time, everyone can connect with like-minded neighbours in the common areas of the apartment buildings.’

However, one of the biggest challenges for developers is to find suitable sites, coupled with rising construction costs, which could mark a shift in the types of assets being built, von Bothmer said: ‘I assume that the increasing number of completed, high-priced concepts can no longer be completely accepted by the market and that a rethinking towards concepts in the mid-price segment will slowly begin.’

International investors circle student housing

Predictably, sharp rise in rents in many university cities in Germany is whetting investors’ appetite.In March, a private real estate fund managed by global alternative asset investment manager Brookfield Asset Management secured a controlling stake in German student housing developer, International Campus Group. The terms of the transaction remain confidential and the deal is subject to the approval of antitrust merger control. Founder of International Campus, Rolf Engel, will continue to chair the supervisory board and the fund management. Horst Lieder will remain as CEO to guide the expansion of the company. International Campus is currently operating, implementing, or planning a total of about 11,800 apartments in 33 locations in four European countries, with a view to adding another 20,000 units in the medium-term. For Brookfield, the deal allowed it to enter Germany’s quickly growing student housing market.

Student housing has become extremely popular with investors in markets where rents have soared in the past five years. In Berlin, for example, they have risen more steeply than in any other German city, up 39% since 2011, according to a recent study of 160 German cities and student rents between 2011 and 2018 by German housing portals wg-suche.de and ImmobilienScout24.

Rentsin Berlin typically cost around €363 per month for a room in a shared house (WG) or €438 for a 30 sqm apartment, a price hike of 6% y-o-y, according to the study. A student looking for a single apartment or large room in a shared house of at least 25 sqm in Munich, which is also close to the university, will need to be prepared to shell out around €785 a month, including utilities, for an apartment or €616 for a room in a shared house, an increase of 6% y-o-y and up 35% since 2011. Stuttgart is the second most expensive city for students, with WG rooms costing €485 per month on average, compared to €438 in Freiburg, €425 in Ingolstadt, €410 in Hamburg and €388 in Cologne.

And as rents rise, so does competition for assets, according to Smith. ‘Rising rents aid the availability of schemes but increases the competition for sites. A number of large players – including Corestate and Allianz - want to grow their portfolios but it can be hard to find the stock.’

Challenges ahead

A lot of investors are eyeing student housing in Germany but there are a number of challenges, according to Smith: ‘Land prices are rising and investors are competing with residential developers. It’s difficult to crack that nut of viability and affordability.’ (ssk)