BRICKS AND MORTAR: Investors look to recession-proof student housing market

BRICKS AND MORTAR: Investors look to recession-proof student housing market
Student Depot's student house in Łódź, Poland, one of just a handful of private purpose-built student accommodation in the CEE region.
By Clare Nuttall in Glasgow April 23, 2019

The private student accommodation segment in Central and Eastern Europe (CEE) is in its infancy compared to the much more developed markets in Western Europe and in particular the UK, as reported by bne IntelliNews. Yet as the numbers of international students in the region increase, the potential market for private purpose-built student accommodation (PBSA) is growing, as revealed by a new study from Colliers International and law firm CMS

The study looks at potential demand over the next ten years, extrapolating recent growth trends, which would see a further increase in international students. Scenarios range from 10% to 50% of international students looking to rent a bed in a PBSA unit. It projects that the shortfall in total supply of new beds across seven major cities in Central and Southeast European countries would range from 5,931 beds to as high as 53,307 beds. Warsaw, Budapest, Krakow and Prague are expected to be the as most under-supplied in the coming years. 

Looking at the size of the marketplace, the CMS/Colliers study projects the value of these shortfalls to range from €422mn to as high as €4.0bn assuming one-bed units (or €281mn to €2.7bn based on 1.5 beds per bedroom unit).

In western Europe’s footsteps 

As with many other sectors, the student accommodation market in CEE is expected to follow the same broad trends as that in Western Europe. 

“Student accommodation has been one of the most successful of the new options for investors and developers in Western Europe to consider over the past ten years. We believe the next ten years will see this new opportunity, alongside its residential peer sectors such as micro living and senior housing, spread into the CEE region,” says the report, which looks at accommodation in Bulgaria, the Czech Republic, Hungary, Poland, Romania and Slovakia. 

At present, however, the “supply of PBSA in the core CEE-6 markets is currently limited to 20 assets,” said Wojciech Koczara, CEE head of real estate and construction at CMS. Its slow development compared to Western Europe is due to a combination of factors: “lack of affordability, the availability of very cheap but low quality private houses and state-owned dormitories and tight university budgets.” 

“But with eight presently under construction across Warsaw, Krakow and Bucharest, development activity in the sector is growing — although arguably at a pace slower than needed, as investors begin to realise the sector’s potential,” adds Koczara. 

CMS and Colliers carried out a survey among 68 investors from across CEE, Western Europe and North America. Of those, 32% were already active in the sector in CEE or said they intend to become active. 

Just 11 were already active in the sector in CEE. However, of the 57 not investing in CEE PBSA yet, four are active in the sector outside the region. Asked whether they planned to invest in the sector, among the 57 respondents not already active in CEE PBSA, 11 said they were planning to invest in the sector, 30 were not, and 16 gave no answer. 

Part of the sector’s attractiveness is that it is counter-cyclical, with no particular link between student activity and spending and economic cycles. In the segment, rents grew steadily, and investment yields were steady in the 5-7% range across Europe, while yields in other sectors fluctuated.

“The end user demand is not correlated with that for sectors more tied to faster GDP growth, for example office or industrial. These characteristics are worthwhile for investors to consider right now, given that GDP growth estimates for the Eurozone (and other countries around the world) are being revised downwards,” commented Mark Robinson, CEE research specialist at Colliers International. 

Overall, the picture is of a slow and steady asset class that has seen uninterrupted growth in Europe in the current economic cycle, with the returns described as “encouraging, not spectacular”.

“Economic growth could well be sluggish for the next two to three years, something like the weak period of the cycle observed between 2000-2002, rather than the sharp collapse and recovery of 2008-09. The elongation of the time period renders more defensive asset classes in commercial real estate, such as private PBSA, relevant,” adds the report. 

Asked when the PBSA sector will grow in importance in the CEE region, 57% of respondents picked the four to eight year time period. 32% were more bullish, expecting a growth in importance in one to three years, while 10% thought it will never grow in importance. 

The study reveals differences between countries in the region with a clear divide between Central and Southeast Europe. 

“Poland is the most popular market for existing investment activity, as well as consideration of investment by those intending that in the future,” it says. “The Czech market also registered, followed by Hungary. Activity in SEE is sporadic and interest in that region is not yet apparent, according to our survey population.”

Unmet demand 

The signs are that demand for private student accommodation will develop in future. “A key demographic shift, with international students becoming an ever-higher proportion of the resident population is shifting expectations and perhaps affordability slowly towards international norms,” says the report. 

Student surveys reveal that many students in the region are unhappy with their housing situation. 27% of Romanian students were on average not satisfied, with high numbers in Bulgaria and Poland as well. 

Moreover, the growing number of international students, especially those from outside the CEE region, tend to have higher expectations of their accommodation, says the report. PBSA providers in the region are typically looking to international students as likely tenants for their accommodation. 

“Universities across the CEE have … become very active in efforts to fill places… Four of the six CEE countries had a higher proportion of foreign students in 2016 than the 3.6% average. The Czech Republic had the third-highest percentage, at 9.8%,” says the report. “This suggests a renewal of housing stock may be overdue: better news for the region’s PBSA providers,” says the report.

The CEE region’s demographics are also a factor. The decline in birth rates in the chaotic early transition years of the 1990s means that the number of young adults, including the student population, has dropped recently. 

On the other hand, aside from the international students, spending power tends to be lower among students in the CEE region than in Western Europe. While the situation naturally varies from student to student, the 2017 EuroStudent VI cited by the report showed that across the CEE region over 20% of students were financially stressed in every country except the Czech Republic, with the figure reaching 30% in Poland and Slovenia. 

“This might not be an encouraging backdrop for the development of more expensive private PBSA in the region,” warns the report, since housing accounts for the lion’s share of students’ spending. “Low levels of budget spending on education in the region means low grants for living expenses, which often means the sharing of rooms, dorms or living at home … Relying on the local student pool to fill a private PBSA portfolio in CEE might be a long term game only.”

Developers are therefore looking to international students as their future tenants. 

“Poland’s student housing sector is an attractive asset for investors. This country has a growing population of students, many of whom are foreign, while available university-owned facilities are able to accommodate only about 9% of them. As a result, young people are forced to live in shared apartments or costly studio apartments. By satisfying this demand, we can produce high rental income and generate tremendous returns for investors,” said Nebil Senman, managing partner at Griffin Real Estate, the founder of Polish dorm rental network Student Depot, as quoted in the report. At the time of publication, it offered 1,500 beds in Poznań, Łódź, Lublin, and Wrocław, with almost 500 more due to come online in the Polish capital Warsaw in September. 

Jakub Bartos, head of residential at Golub GetHouse, has a similarly positive view of the Polish market, where the company embarked on the LivinnX Kraków student hall with 290 residential units. 

“In my opinion, the market of private residence halls is one of the most promising real estate sectors in Poland. Currently in Poland, university housing and private residences satisfy less than 9% of existing demand. There is a shortage of accommodation for students, and the potential for development is enormous,” he said.