Student housing: dig this

It’s no secret that landlords in the student housing market were dealt a hefty blow in 2020/2021 when rental income streams dried up virtually overnight as Covid lockdowns forced university classes online.

At the time, many feared the pandemic-induced shifts in how people live, work and study would prompt a permanent adoption of virtual learning — and nullify the need for student accommodation.   

As it turns out, that didn’t happen. If anything, school leavers are flying the coop in ever greater numbers as they look to pursue tertiary education opportunities away from their hometowns.   

Industry players say the trend is expected to place further pressure on supply, with the current national shortfall of about 500,000 student beds likely to reach almost 800,000 by 2025, by the International Finance Corp’s estimate.

South Africa’s shortage of affordable accommodation close to the campuses of universities and tertiary training colleges is supporting a strong wave of institutional capital flow into purpose-built student housing developments.

For example, Growthpoint Properties, the JSE’s largest South Africa-based property stock, launched an unlisted student housing fund 18 months ago through Growthpoint Investment Partners.

In partnership with developer Feenstra and other third-party institutional investors, it has assembled a portfolio of more than 7,200 student beds, valued at R3.5bn, in buildings in Joburg, Pretoria and Cape Town. And construction will soon start on a R500m pipeline of new projects.

Growthpoint’s aim is to grow its student housing fund to at least 22,000 beds worth R10bn-R12bn in the next four to six years.

Rand Merchant Bank-backed developer and asset manager Eris Property Group, for its part, plans to roll out 10,000-15,000 purpose-built student beds within the next few years through its impact investments business.

The company is raising R2bn in equity capital to fund these developments.

Growthpoint Investment Partners head George Muchanya says though student accommodation is still a fledgling asset class in South Africa, the availability of capital is starting to increase as investors become more comfortable with alternative real estate sectors — student housing, schools, health care and retirement homes, for example.

Muchanya believes these real estate subsectors offer diversification, specialisation and, importantly, potentially higher returns than traditional retail, office and industrial portfolios.

“Alternative real estate has the potential to unlock growth opportunities amid South Africa’s weak economy and oversupply of commercial space,” he tells the FM. “That’s especially true in the present environment where tighter access to capital means that development in the traditional property sectors is likely to be limited.”

Muchanya adds that the purpose-built student accommodation sector is also well suited for social impact investment and presents new opportunities for public-private partnerships. 

In addition, the sector is backed by strong fundamentals: demand exceeds supply, which means income and capital growth for investors, he says. Growthpoint Investment Partners, for example, is targeting total returns of about 13%-16% a year over the long term.

Johan Janse van Vuuren, Eris Property Group’s executive head of student accommodation, agrees that student housing offers investors both above-average returns and positive social benefits.   

Alternative real estate has the potential to unlock growth opportunities amid South Africa’s weak economy and oversupply of commercial space

—  George Muchanya

Speaking at the inaugural Residential Investment & Development Conference in Sandton earlier this month, Janse van Vuuren said South Africa is in a unique situation, given that its student housing market is supported by billions of rand in accommodation grants from the government’s National Student Financial Aid Scheme (NSFAS).

NSFAS funds about 1-million tertiary students who qualify for financial support (those falling below a household income threshold of R350,000 a year). About 35% of its current annual R47.7bn budget is spent on accommodation.

In fact, there’s nowhere else in Africa where so much capital is flowing to the student housing market, according to Janse van Vuuren.

“We have a massive shortfall, massive demand and a government that subsidises needy students,” he said. “Combined, these factors create cash flow certainty for investors and financiers looking to fund these developments.”

However, both Janse van Vuuren and Muchanya stress that recent changes to the NSFAS model and uncertainty about how and when policy reforms will be implemented could chase capital away from student housing developments. 

With the market mired in confusion around NSFAS, investor confidence levels have been damaged, said Janse van Vuuren, with some already turning off their funding taps. It’s a development that is stalling the rollout of Eris’s student accommodation pipeline.

“NSFAS uncertainty has destroyed investor comfort levels,” he said.

Muchanya reckons NSFAS’s capping of the student accommodation allowance at R45,000 a year is particularly problematic. He says it’s difficult to provide students with decent accommodation within this budget while also including the free add-on services dictated by the funding organisation’s minimum norms and standards requirements.

The combination of rising building costs, interest rates and operating costs — especially administered costs such as rates and taxes, electricity and water — are steadily eroding profit margins. 

“This is resulting in unacceptable returns on investment. If not addressed, we are likely to see investment capital dry up for NSFAS-focused student accommodation,” says Muchanya .

“Continued uncertainty will focus capital on opportunities for non-NSFAS student accommodation, to the detriment of the neediest portion of the student population.”

While uncertainty around NSFAS-funded student accommodation has damaged investor confidence levels, the mid to high end of the market is flying

—  WHAT IT MEANS:

Concerns around NSFAS — felt primarily by owners and operators of institutionally-backed student housing developments — have seemingly not deterred smaller private investors looking to expand buy-to-let portfolios in the mid to high end of the market.   

Galetti Corporate Real Estate associate director Dean Wiid says returns on student accommodation near major tertiary education campuses remain compelling, despite higher interest rates pushing up monthly debt repayments.

The pivot to remote learning clearly hit the market hard during Covid, but “now that in-person classes have resumed, the sector has come back stronger than ever”, he says.

Wiid believes student housing is the one sector of the property market that’s remained immune to the impact of interest rate hikes. “It continues to generate steady, profitable income streams for investors and developers alike,” he says.

Wiid cites an ongoing undersupply as the main reason for the sector’s relative strength. He says most university-managed residences can only accommodate a fraction of their student population, with thousands placed on waiting lists every year.

So there’s a huge gap in the market to provide rental accommodation for students who aren’t able to get into university residences. In particular, Wiid says there's high demand for rental stock in the R5,000-R10,000 a month bracket. 

Student-focused developments that offer on-site lifestyle amenities such as gyms, media centres, high-speed internet and study areas, soccer fields, swimming pools and laundromats are increasingly common. And luxury Gen Z-targeted offerings such as access to therapists, wellness cafés, concierge services and electric scooter rentals are also being added to the mix, he adds.

One new student-focused development that will cater to this market is Volley Brooklyn, less than a kilometre from the University of Pretoria. It offers 41 apartments priced from R1.15m to R2.98m.

Also under construction is ultra-luxury development The One, in notoriously pricey Stellenbosch. A five-minute walk from Stellenbosch University, the “Rolls-Royce” of student accommodation offers 508 studio, one- and two-bedroom units, with prices starting at R1.55m for a 23m² apartment.

Prospective tenants are already signing up for 2025 at monthly rentals that range from R10,500 for a studio to R20,000 for a two-bedroom flat.

Lifestyle features include a resort-style swimming pool, cinema, gaming room, convenience store, restaurant and coffee shop, braai areas, fire pit and even a “Zen” courtyard.