US student housing investment at an all-time high
It’s a good time to be in student housing development in the United States as investment in the area reached a record high this year and prices per bed top US$90,000.
A new report from Real Capital Analytics (RCA), and reported by Education Dive, found that investors had “discovered” the sector in recent years causing it to swell over the last decade.
The influx in investment was, however, in line with a surge in the college-age population during that time. As this has now stagnated and enrolments are expected to plateau, RCA questions whether the current high prices can be maintained.
In an editorial analysis of the report, Senior Vice President of RCA Jim Costello explains that buyers active in this space are attracted to the growth in demand and have compressed capitalisation rates to record lows.
Capitalisation rate – or cap rate, as it is commonly referred to – is the rate of return that is expected to be generated on a real estate investment property. It is a widely used measure through which real estate investments are assessed for their profitability and return potential.
With cap rates moving to such low levels, sale prices are now at record highs, pushing the prices per bed above the US$90k level.
An April report from property experts Savills supported this finding, recording student housing investment in the US at US$10.8 billion in 2018 – an all-time high for the sector. A handful of major deals made last year were found to be driving the high number.
An example of this is Greystar Real Estate Partners acquisition of EdR, one of America’s largest developers, owners and managers of high-quality collegiate housing communities. The deal was completed in September 2018 for US$4.6 billion.
RCA found in 2018, investment managers, real estate investment trusts (REITs) and cross-border investors were behind 50 percent of all acquisitions in the sector. That’s a 20 percent increase from before the prices started rising.
The escalating prices, however, have pushed many less affluent students out of the major metropolitan areas into more affordable outskirts. It is also having the adverse, unforeseen effect of pricing out many city residents, according to a report from Blueprint, an online magazine from investment firm CBRE.
The magazine found that as luxury student housing is gentrifying inner-cities with privately owned residences, residents are no longer able to afford the cost hikes.
This proliferation of luxury student accommodation in the cities may be shortlived, however, as Costello warns. Given the dropping rate of student enrolment, it’s possible developers may have overinvested and it may not be long before they’re facing a new “challenge with too many beds and not enough students.”