July 14, 2017, 6 a.m. | Lucro Staff | Deal Review

How Foreign Investment in Student Housing is Driving the Sector’s Record Growth

Foreign investment in student housing is on the rise for a number of reasons that are directly tied to the reputation surrounding American higher education.

Between 2000 and 2015, enrollment in U.S. undergraduate degree programs increased by 30 percent, from 13.2 million to 17.0 million. By 2026, that number is expected to increase to 19.3 million. Foreign-born students are making a significant contribution to this increase. International undergraduate enrollment has increased more than 17 percent and is expected to continue its double-digit climb over the decade.

And these trends are causing a boom in the real estate student housing sector, particularly among foreign investors.

We recently took a look at what was driving foreign investors’ interest in the hospitality sector. Today, we take a deep dive into what, and who is driving demand for student housing.

Foreign Investors Drawn to U.S. Real Estate

In 2015, foreign investors purchased a record-breaking $78 billion worth of U.S. commercial real estate. To put that number in perspective, consider this: in 2009, just six years prior, foreign investors purchased only $5 billion worth of U.S. real estate assets.

There are a number of reasons why this is happening. As we explained in our last article, the influx of cross-border capital is largely attributed to economic, social, and political instability abroad. For example, the price of oil has dropped, the U.S. dollar has strengthened, and Great Britain’s decision to leave the European Union stunned observers from around the world.

Though the U.S. economy has continued chugging along a positive trajectory, the European and Asian markets have experienced volatility. As a result, foreign investors see the U.S. real estate market as a relatively safe place to park their capital in the interim.

Foreign Investment in Student Housing - Allured by the Prestige of American Higher Education 

Until recently, student housing has never been considered a standalone real estate investment category. Most have, and many still do, lump it within multifamily housing. That’s starting to change as more people recognize that student housing has characteristics distinct from traditional multifamily properties.

The biggest difference is that owners charge rent by the bed as opposed to the unit. As a result, unit mix tends to differ. In a standard apartment portfolio, investors generally strive for a mix of one and two-bedroom units. Most student housing properties consist of three and four-bedroom units. Student housing also has different lease cycles, with units leasing around the academic calendar instead of throughout the year.

In terms of total dollar volume, foreign investment in student housing is not necessarily that impressive. Foreign investment is still primarily geared toward traditional multifamily housing, office, and industrial.

What’s striking is the proportion of foreign capital going into the student housing sector. Roughly 20 percent of capital coming into the sector is coming from abroad, a staggeringly high number when compared to the roughly 5 percent investment in traditional multifamily. Proportionally speaking, foreign investment in the student housing sector is as high as investment in any other commercial real estate sector. And foreign investment in student housing is only projected to climb.

Foreign investment in student housing is on the rise for a number of reasons:

  • Strong property fundamentals. Student housing’s strong growth prospects are driven by the sector’s strong property fundamentals, such as steady revenue streams and comparably low vacancy rates. In 2016, the average per bedroom rental rate increased 3.6 percent and occupancy rose by a half-point. Similarly, college enrollment continues to climb. Enrollment at the nation’s top 175 four-year public and private universities has increased every year since 1990, with the exception of a slight dip in 1993-1994 before trending upwards once again. On-campus student housing can typically only accommodate one-fifth to a quarter of enrolled students at many colleges and universities, presenting an opportunity for foreign investors to buy off-campus housing.
  • Yield premium. Although the cap rate spread between student and conventional housing has compressed in recent years, student housing cap rates typically run 0.5 percent to 0.75 percent higher. In 2016, student housing cap rates averaged 20 basis points higher than multifamily housing. The spread was as high as 50 basis points in the major metro areas home to large, internationally-renowned colleges and universities where parents are willing to pay a premium for their children to obtain a world-class education.
  • Significant price appreciation. On a price-per-bed basis, student housing reached a record high in 2016. The $66,386 per bed average was 10 percent higher than 2015 and 30 percent more than 2014.
  • Pent-up demand. The median age of a college dorm is 51 years. Students are tired of living in dilapidated, off-campus housing. The aging and constructed stock of college dorms creates unrecognized value for investors.
  • Ability to weather an economic downturn. Student housing is at least somewhat insulated from economic downturns. “When you remind investors that when the economy goes into a recession, enrollments go up – a light bulb goes on in their heads,” EdR Chairman and CEO Randy Churchey said during a recent panel discussion. “What really attracts [foreign investors] to our business is the stability of cash flows.”
  • Personal connection to a college town. Many foreign investors are drawn to the U.S. housing sector because they were educated here, or because their children are going (or are planning to go) to school here. They’re familiar with the local markets, especially those with big-name universities like Harvard and Stanford.

Foreign Investment in Student Housing Takes Many Forms

Private developers, public real estate investment trusts, and private equity firms are certainly the largest buyers of U.S. student housing. “Equity, including global equity, is seeing student housing as the place they want to be,” says Bill Bayless, President and CEO of American Campus Community. The bulk of this capital is coming from China, the Middle East, and Canada.

However, institutional investors aren’t the only ones to enter the fray. We’ve seen an uptick in cross-border capital coming from mom-and-pop investors buying U.S. real estate for their children to attend local colleges and universities.

The story of Owen Wang is a perfect example. The Chinese grad student was under strict orders from his parents: he needed to find a condo before he began his studies at DePaul University. He had a $400,000 budget to do so, an amount that could take him pretty far in the Chicago neighborhoods he was exploring. He toured multiple units, sending pictures to his parents back in Zhengzhou, China along the way.

Jane Ruan did the same thing. The Northwestern University engineering student moved from her sorority house into a newly renovated condo that her parents paid about $200,000 for back in 2015. “My parents don’t mind if they lose a couple thousand dollars (when they sell) in exchange for better living conditions, time saved walking and how safe it is – that’s their biggest concern,” Ruan told The Chicago Tribune. Her parents also purchased a condo downtown so they could be close to their daughter when visiting from China.

For many parents abroad, buying their child an apartment while they’re in college is a no-brainer. Compared to the price of housing in cities like Tokyo, Hong Kong, Shanghai, Dubai, and Singapore – U.S. real estate seems like a bargain.

“The Chinese kids normally come from very wealthy families, and they feel like, 'Wow, houses here are so cheap,'” says real estate agent Justine Zhou. She’s hired two additional Chinese agents to join her team in anticipation of doubling her business with foreign clients.

Impact of Foreign Investment on Student Housing Sector

With more cross-border capital flocking to the student housing sector, prices have gone up and yields are being compressed, experts say. Some companies used to be able to deliver cash-on-cash returns in the mid-teens; now they’re in the low-teens with pressure continuing to grow.

Institutional investors tend to be drawn to Class A student housing. Pension funds, REITs, and others are pumping foreign capital into luxury complexes that offer amenities like rooftop pools. This has created an opportunity for foreign investors to add mid-market student housing to their portfolio, as these older, less expensive student housing communities are achieving higher than average rent growth.

We’re also seeing smaller scale foreign investors shift their focus to mid-market student housing. Institutional investors tend to flock to student housing in gateway cities like San Francisco, New York, Boston, Los Angeles and Miami. Priced out of these markets, foreign investment in student housing are beginning to move towards places like Houston and Atlanta.

Looking Forward

There’s been a pullback on construction lending by U.S. banks in the first half of 2017, which is expected to slow the development of new student housing. This presents a challenge for U.S. borrowers, but an opportunity for foreign investors. The sector’s leasing velocity is at record highs and revenue is expected to climb as supply continues to be constrained.

“The challenge will be finding and securing attractive and buildable sites that have high walk scores and are close to campus borders,” says Scott Streiff, EVP with real estate services firm JLL. Foreign investors are expected to start looking for value-add and renovation projects slightly further from campus.

As the student housing sector continues to mature, we suspect foreign investors will continue to view it as a lucrative opportunity – particularly for those with college-aged children. Student housing is not for the faint of heart. Renting to students has its own host of challenges. But investors who do their homework and study market trends carefully should expect to get a decent rate of return on their student housing assets for the foreseeable future.

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