Student housing: The next big real estate asset class?

[] Amidst the slowdown in the real estate sector, one segment has the potential to offer lucrative returns for both, developers and investors – student housing

Globally, student housing is acknowledged as an important and lucrative real estate segment. It is generally included under the ‘alternative’ real estate asset classes. In its current form in India, student housing essentially comprises of buildings that primarily offer residential accommodation for a large numbers of students in boarding schools, colleges or universities. However, the residential facilities in such institutions are invariably severely under-equipped. Also, the services and amenities often fall far short of the international standards, seen in established student housing markets such as the US or UK.

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The education sector in India is growing rapidly. With the increasing number of students enrolling for higher education each year, student housing is obviously a complementary product to this growth. Interestingly, the opportunity has come at a time when residential real estate (accounting for close to 85% of the value of the investable real estate market) is currently witnessing a slowdown. Consequently, certain developers could bank on this opportunity, to transform specific under-construction residential projects into student housing, bringing it under the more lucrative rental-yielding commercial project stream.

Emerging concepts like student housing, can help developers and investors to diversify into an income-yielding asset class that can potentially offer higher yields than the commercial office and retail properties, because of a favorable demand-supply scenario. In the US and UK markets, student housing is already an established and investor-friendly asset class, because of its size and attractive market yield.

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Globally, this segment, which has already attracted 200 billion dollars of investment, is essentially operated on a lease rental basis. Student housing in London has gained prominence, mainly because of the higher yield rate, which has recently been 4.5% versus commercial yield rates of 3%.

Student housing: The next big real estate asset class?

In London, there are currently 3,76,000 students enrolled for higher education, out of which 2,90,000 are full-time students. This number has grown by 42% in the 10-year period up to the academic ear 2013-14, as shown in the figure above. A significant 28% (1,04,000) of the total enrollments are from students outside the UK, who need local accommodation. This statistic has almost doubled in the said period. Globally, the number of students abroad is likely to double to 8 million by 2025, according to OECD ‘Education Indicators’ estimates, which also predict that London will have 2,24,000 students in the next decade.

Despite being an established market for student housing, the UK is also confounded by a demand-supply imbalance that works in favour of developers and investors in this asset class. The student housing market there has also evolved to a level, where differentiated categories – premium (examples include brands like Nidos and Urbanest) and mid-level (Unite and Liberty) – have evolved. Both categories have been successful in the UK and achieve high yield rates.

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The potential for success of the student housing real estate market in India could be similar, or greater than the UK. Some of our cities, such as Pune, Bengaluru and Chennai, see very high annual student enrollments. There are 34 million students in India for higher education, of which 76% (26.6 million students) migrate from different states to these cities and invariably require accommodation. A broad estimate indicates that currently, cities like Pune and Bengaluru can only accommodate about 18%-20% of the inward migrating students.

In short, student housing as a product is severely undersupplied in the major markets and has the potential for high and sustained occupancy rates. This provides a marked opportunity for investors focused on attractive yield-based real estate products. Concurrently, student housing in India has immense scope to be developed as an asset class for developers.

It is true that this is a very new and largely unfathomed asset class in India. However, so were malls and serviced apartments at one point of time and both these products have successfully transitioned into organised sectors and are money-making asset classes. The demand for student housing in India will grow rapidly. So, this alternative real estate segment, has all the hallmarks of becoming a revolutionary new product in Indian realty.

(The writer is local director – strategic consulting, JLL India)

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Category: Lifestyle

Debora Berti

Università degli Studi di Firenze, IT

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