Warning on trend reversal in German student housing market

A new study published by property advisors Savills warns of a potential trend reversal in the booming German market for student accommodation, suggesting that investors may need to pay much closer attention to the specific details of both the geographic location and the properties themselves, to avoid future investing mishaps.

While the fundamentals of the market remain positive, investors should be aware of demographic and other factors which are likely to make the market a lot more competitive, with assets in second-rate locations or with substandard facilities no longer certain they can rent out their rooms at ever-rising rents, in markets where demand has to date far exceeded supply.

Savills suggests that clever investors should intensify their investment analysis of cities and micro-locations, including looking at locations near universities whose first-year enrollments has been bucking the overall trend, such as RWTH Aachen. Closer analysis of enrollment figures for the nation’s Universities of Applied Sciences could also reward investors, say Savills.

Still, Savills still sees plenty of capital flowing into the student residential sector. Alexander Bräul, responsible for capital markets at the broker, says: "Student housing complexes remain a sought-after investment alternative due to their yield advantage over multi-family houses. The perspective of slightly increasing risks will possibly lead to greater restraint among some very risk-averse investors. Existing properties already established on the market could benefit from increasing risk aversion compared to project developments."

The number of first year enrollments in German third-level institutions in 2021 was 7% below the level two years ago, declining for the second year in a row. With about 2.97 million students enrolled in total across German universities, that number has never been higher, but the numbers have been swollen by the lower number of students graduating, and therefore still retaining their student status.

Matti Schenk, Savills’ head of research, said: "For the coming years, we can therefore expect slightly declining student numbers, because even a strong increase in the number of international first-year students would not be able to compensate for demographically induced declines in the number of domestic first-year students. In addition, there is likely to be a catch-up effect in the number of graduates."

It's not just a shift in the demand for accommodation, but the housing markets themselves are changing. For the first time in years, vacancy rates in the top 30 university towns have stopped falling, and availability of housing for students is no longer tightening.

Schenk explained: "Looking at the rising number of building completions and the declining population growth in many cities, the supply-demand ratio is likely to shift somewhat in favour of tenants in the coming years. Falling numbers of new students will have an additional relieving effect on the housing markets in university towns.”

Savills’ figures show that the top 30 student markets in Germany had about 66,100 beds at end-2021 in private student accommodation, while the total share of student housing in the Top-30 university towns makes up an average of 14.2% of all local housing available. The share of private student accommodation has nearly quadrupled in the last ten years, and is expected to exceed 80,000 beds by 2025.

This also increases the amount of student accommodation that is investable by institutionals. After the collapse of transactional volume in the first COVID year of 2020, the market bounced back in 2021, reaching €840m last year, its second-highest year ever.

Bräul said they were seeing several new investors entering the market. "Bidding for well-positioned student housing properties continues to be intense,” he said. “Accordingly, prime yields declined to 3.3% last year. Overall, we expect further slight yield compression for prime properties."