The future looks promising for Europe’s student housing sector, writes architect Paul Cordogan
With market volatility and international political uncertainty threatening to check the pace of Europe’s economic recovery, a number of investors have turned to alternative and emerging sectors to expand and diversify their portfolios.
Student accommodation is an attractive alternative market that continues to return solid yields despite a sluggish post-recession economy. As a result, the student housing market has shown substantial growth in Europe since around 2012 and has matured from a fashionable niche into a mature and robust asset class.
Supply and demand
While the US remains the largest and most mature student housing market, Europe and the UK in particular have followed suit in recent years and have seen dramatic growth in the purposebuilt student accommodation sector. This is in part due to an ongoing shortage of viable and enticing rental options for students in university cities.
Despite leading the response to demand in the sector, the UK suffers from relatively low provision rates, with Germany, France, and the Netherlands showing signs of activity, but lagging further behind. Spain and Italy’s student accommodation markets have yet to address demand in any substantial way, with exceedingly low supply.
International study and spend
In addition to domestic enrollment growth, the increasing competitiveness of European universities both in quality of education and tuition prices compared to the US has spurred large numbers of foreign students to go overseas for higher education. The burgeoning middle classes of China and India, alongside a continued flow of well-heeled students from the Middle East and the Americas, has allowed developers to focus on prime assets catered for tenants looking for the best in location, accommodation and amenities.
With growing availability of Englishtaught degrees and the increasingly global mindset of the millennial generation, the trend of overseas students moving to Europe for higher education shows little signs of slowing down.
The arrival of institutional investors
In response to strong demand, the rise of the student housing sector began with small-scale, opportunistic, single asset projects by smaller investors who typically also operated the facility post-completion. Early success for those investors, despite the recession, led to institutional interest in portfolio opportunities within the sector. These portfolios are indicative of the sector’s maturity along with the emergence of dedicated real estate investment trusts (REIT).
Big deals and big growth
The arrival of institutional investors to the student accommodation market not only signaled its mainstream acceptance, but also facilitated heightened growth as a consequence of REITs opening the market to investors from around the world, with 2015 seeing a marked increase in overseas investment into the sector headlined by a €1.3 billion deal by a Canadian pension fund.
While blockbuster investments like those made by the Canada Pension Plan Investment Board are still the exception rather than the norm, there remains a growing trend for crossborder investment that seems set to continue in 2017.
Investors eye the Continent
Due to the inflow of institutional money and the subsequent progressive growth of the student accommodation sector in the UK, the market is reaching maturity and approaching saturation. As a consequence, investors are taking their experience from the UK and are looking towards continental Europe as the new frontier.
Market perception is that the student accommodation market in mainland Europe is at least 10 years behind the UK in terms of provision and quality, with the relatively weak pipeline offering significant development and investment opportunities. The continental Europe student housing market exhibits the same demand drivers and supply shortages that its mature predecessors have begun to address. Cultural diversity, courses being offered in a variety of languages, and cost competitiveness means that continental Europe draws large numbers of overseas students, further reinforcing demand. The future looks promising for Europe’s student housing sector.
Design and the future
As purpose-built student housing development ramps up across Europe, building design and construction professionals will face a diverse set of challenges to help investors continue to reap healthy returns. Tiered product quality is becoming an important driver of investment returns much like the hotel and hospitality market. An implicit consequence of sector growth is that competition and market saturation will become primary obstacles. In addition, high land values in major cities continue to make student housing development prohibitive, therefore designers need to maximise efficiencies to improve the viability of future projects. Focusing on design aspects such as bedroom clusters instead of studios, smaller bedroom sizes and better use of common spaces can improve investment returns. Designers can also create flexible living spaces that can be used for both student housing and open market residential rentals, thus enabling investors to better manage risk.
The millennial mind
The nuance of demographic change is a key variable often overlooked and typically underestimated. Designing for the millennial college student requires intuition and an acute understanding of the pressure points of how significant value can be added to a project without affecting overall cost, ultimately leading to better returns.
Today’s prospective student housing tenants are valuing access over ownership meaning they have higher expectations of amenities, finishes, technology and location at the expense of traditional accepted standards of delineated personal space and privacy. Good design ultimately drive enhanced returns.
The significant growth of the student accommodation market in the UK, and now Europe, is seeing the sector mature into a recognised institutional product. The continued gap between supply and demand, even in mature markets, offers significant opportunities for development, and therefore, investment, especially in continental Europe. A combination of responsive investing and innovative design will ensure the long-term viability and continued success of the market for years to come.