Many predicted that the pandemic would irrevocably change the tertiary education landscape and do away with the need for student rental accommodation on or near campuses.
But that didn’t happen. Instead, students across the globe have returned en masse to the physical halls of learning, says Julia Martin, head of student housing at investment advisory firm JLL for the Europe, Middle East & Africa (EMEA) region.
JLL data shows that while investment volumes fell sharply across most real estate sectors last year due to rapidly rising interest rates, a record €11.6bn was deployed in purpose-built student accommodation in the EMEA region.
In a report on the investment case for student housing, Martin says investor appetite for student accommodation is set to rise further on the back of a growing shortage in many markets, which is driving rental growth and capital returns.
JLL estimates that in the UK and EU alone, there are at least seven students for every available purpose-built student bed on or near university campuses, meaning 11-million students (out of a total 20-million) have to rely on the private rental market.
A similar scenario is evident in South Africa. The International Finance Corp estimates that the current national shortfall of 500,000 student beds will reach 780,000 by 2025.
Student rental housing as an asset class is still in its infancy in South Africa with little institutional backing
Yet student rental housing as an asset class is still in its infancy in South Africa, with little institutional backing, says Craig Smith, head of research at Anchor Stockbrokers.
He notes that unlike its US, UK and European counterparts, the local sector is largely fragmented in terms of ownership, which means it’s difficult for private equity investors and pension funds to build portfolios of scale.
And little new investment has flowed into the JSE’s property sector in recent years, making it difficult for real estate investment trusts (Reits) to expand portfolios.
But Smith says that as interest in Reits rebounds, alternative sectors such as student housing, last-mile logistics and data centres are likely to attract more money than traditional office, retail and industrial-focused portfolios.
Growthpoint, the JSE’s largest South Africa-based Reit, is leading the charge into the student housing market. In fact, it’s now the only property stock that offers access to this potentially lucrative sector — albeit only as a small portion of its sprawling R174bn asset base.
The company's third-party fund management business, Growthpoint Investment Partners, launched a purpose-built student housing fund in December 2021.
Property group Feenstra is a shareholder of the unlisted vehicle, known as Growthpoint Student Accommodation Reit, and is responsible for day-to-day management of the buildings under the Thrive Student Living banner.
The fund has made impressive headway to grow assets under management. The R3.5bn portfolio already spans 7,200 beds across 10 developments, all within a 10-minute walk of major universities in Pretoria, Joburg and Cape Town.
In January alone, three new residences opened, all of which are already at least 97% occupied: Apex Studios in Braamfontein opposite Wits University; Peak Studios in Observatory, Cape Town; and Brooklyn Studios in Hatfield, Pretoria.
Four more developments are under construction near Wits, the University of Johannesburg and the Tshwane University of Technology. Further developments worth R1bn are in the pipeline.
George Muchanya, head of Growthpoint Investment Partners, has ambitious plans to grow the portfolio more than threefold within the next five years. He hopes to take the bed tally to 22,000-25,000 by 2028 — or an asset value of R12bn, whichever comes first.
That will pave the way for a separate JSE listing, he says. Besides greenfield developments, Muchanya also sees potential to convert office buildings into student residences — provided they’re in the right location.
The fund just bought an old office block in Princess Street in Parktown opposite the Wits Medical School for R35m. The basic structure is already there and with another R170m it can easily be converted into a 500-bed student residence.
That’s about one-third less than what a new build would cost. And the residence can be delivered in about half the 18 months or so it takes to build from scratch.
But it’s the smaller, regional universities across KwaZulu-Natal, the Free State, the Eastern Cape, North West and Limpopo that have the biggest undersupply. “Few, if any, developers are active in these regions,” says Muchanya.
Still, Growthpoint’s push into the student housing market and its proposed listing could be hamstrung by the uncertainty engulfing the National Student Financial Aid Scheme (NSFAS).
NSFAS funds about 1-million 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, and in January NSFAS capped its accommodation allowance at R45,000 a year, down from R60,000 in 2022 (for most of the larger universities).
The cuts were announced without warning or consultation with students, universities — or landlords. That’s had a profound impact on registered accommodation providers; annual rental rates in Growthpoint's Thrive residences last year varied between about R60,000 and R85,000, and about 60% of its tenants are NSFAS-funded.
Muchanya says: “We didn't want to disrupt NSFAS students and tried to keep as many in their rooms as possible so we are footing the bill for the shortfall.”
But that has put pressure on the fund’s rental income stream, which he says isn’t sustainable from a return-on-investment point of view. Profits are being further eroded by rising building costs, rates and taxes, interest rates and operating costs — most notably providing backup electricity.
We wanted to keep as many NSFAS students in their rooms as possible so we are footing the bill for the shortfall
— George Muchanya
“NSFAS imposed a one-size-fits-all policy, which isn’t practical. A student room in an old building with limited amenities in Empangeni, for instance, can’t command the same rental as a brand-new development with all the bells and whistles in Cape Town,” says Muchanya.
He stresses that purpose-built student developments provide much more than a bed and a building. For example, Thrive offers students emotional and educational support as well as a host of add-on amenities such as games and television rooms, study rooms fitted with free computers, kitchens, laundries, braai areas and clubhouses.
A key concern is that no-one knows what NSFAS’s accommodation grant will be for 2024. “We don’t know if the allowance will be amended again. So no-one can plan ahead,” says Muchanya.
Meanwhile, it’s becoming increasingly difficult to persuade investors to allocate capital to a sector that’s heavily dependent on government funding.
As Muchanya points out, “the NSFAS uncertainty has created an additional layer of risk, which many investors are not prepared to take”.
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