Student housing robust enough to outlive pandemic downturn

Despite the negative effects of the coronavirus pandemic on student life everywhere, demand remains high from investors for exposure to the student housing sector, which is seen as less dependent on business travel than its cousins, micro-living and co-living, which have been suffering more over the past twelve months.

Pushing ahead with their German expansion plans are TPG Real Estate Partners (TREP) and investor-developer Round Hill Capital, who have just bought two further fully-operational student residential complexes for their joint venture for €68m. The joint venture was formed in July 2019 and now totals over 2,500 units across the country's major university cities incuding Berlin, Munich, Stuttgart and Dresden. 

The latest purchases are located in Obersendling in Munich (287 units) and Innere Neustadt in Dresden (199 units). Both assets will be operated by operator Nido Student, which currently operates 28 student residences across Europe, including 12 in Germany.

Michael Bickford, founder and CEO at Round Hill Capital, said, "Whilst Covid-19 has presented short-term challenges, the deal highlights the resilience of the PBSA sector, and the ongoing appetite for high-quality student accommodation assets across Europe’s major cities." He said the company would continue to acquire and reposition existing assets, as well as develop new purpose-built properties across select university cities in Germany. The existing project portfolio from 2019 is nearing full operation with the last development set for completion in March 2021.

Investment volumes in the student housing sector in Europe reached €9bn in 2020, despite the lockdowns and travel restrictions.

In a recent online presentation, Round Hill Capital's head of student accommodation Brian Welsh talked about how the sector's strong fundamentals have led even the most cautious of banks to continue supporting student accommmodation through the pandemic. “Banks see it as a short-term blip and are taking a sensible view on debt. They get the situation and should be applauded for their support. Student housing is seen as a benign asset class by lenders, who have much bigger problems on their books at the moment.” He said there was little sign of any covenants being broken, nor assets being discounted in the market.

At the same REALX.Global online briefing, Will Rowson, the CEO of expansionary US and UK group GSA Global Student Accomodation, said: “Covid-19 is a blip in the progress of PBSA across the world, while it has exacerbated challenges in other sectors. Most investors can see beyond the temporary drops in income to the long-term growth ahead, which is why we are seeing a broader range of investor demand than in the past, including HNWIs.” He said his company wanted in future to do more in fewer markets, with the US and UK as the biggest and most mature markets preferred, followed by Germany and then other EU.

Stephen Miles, responsible for investment Continental Europe at CBRE, said: “There is strong investor demand and most institutions are still underweight, they want to increase their exposure to the sector. We’ve seen compression on yields in the last few months. 

“A lot of transactions are development and forward-funding, which jumps over the problem because it takes you past the pandemic scenario. The forward-funding market has been really interesting. Of course there are underwriting challenges, some systemic and some due to the Coronavirus bump in the road, but I’m pretty optimistic on the sector’s future. My advice is be diligent in your underwriting and be careful about price points.”

Rainer Nonnenmacher, the CEO of German group International Campus, said that Germany would remain a key focus for his group, and they were having success finding sites where international competitors were pulling back. The company has more than 5,800 apartments in operation and under construction in Germany, Austria, the Czech Republic and the Netherlands in its student living and professional living (micro-living) divisions. It now employs 120 people across six offices.

Mark Holz, the head of research at CORESTATE Capital, said that while the number of new foreign students coming to Germany was down 20%, the long-term trend is still up and the sector can withstand this disruption. Despite coming late to the industry, there are many reasons why Germany should continue to prosper in the sector, including Brexit, and good value for students' money, he said. The polycentric nature of Germany adds to the attraction for investors, with a broad range of investment locations.