Australian Purpose-Built Student Accommodation: A New Hotspot

Introduction

The global economy was affected by several noteworthy events in 2022, and the course of recovery was primarily decided in the final quarter of 2021, owing to the brief market refuelling. During the pandemic, the entire student accommodation market went through a downfall, also known as the Black Swan event, due to the closure of international borders.

One such country that closed down borders to contain the coronavirus was Australia. As a result, the majority of mainstream real estate asset classes experienced performance declines because of a sluggish economy. Nonetheless, the fast-recovering economy was able to defy the challenges and grow into a bigger market, ultimately showing up on the radar of real estate investors.

Recent changes have shown that property operators might reach their desired occupancy rate early, even before university enrolments reach their target. This might also be because the need for more quality student accommodation in Australia is greater as compared to the other higher education markets. According to the Global Student Housing Report by amber, the Australian student accommodation market is currently valued at USD 3 billion and is projected to grow more in the coming years. This is one of the major reasons why student accommodation in Australia is steadily emerging as a lucrative avenue for investors.

1. Student Accommodation in Australia: Market Conditions

Analyzing the market conditions for student accommodation in Australia, we can primarily define the scope of growth for investors in this two-fold analysis:

1. Demand vs Supply of Student Beds: Even though the influx of students is on a global front, students from the Asian sub-continent have been witnessed to add maximum numbers. This is due to the increasing disposable income of the middle class. The other major reason is the provision rate, i.e. the student-to-bed ratio, which is inversely proportionate. Due to this, the number of beds available is unable to keep up with the demand of the students. According to JLL number of student beds in Australia was 112,000 in 2022 which in comparison with the total number of applicants, is significantly low, creating a space for new developers to capitalize on the need for student housing.
2. Lucrative Opportunity for Investors: In terms of the micro aspects of the market, there is a long list of motivators. The report by JLL states that student to bed ratio in Australia stands at 7:1, indicating the strong demand for student lets post-pandemic. The overflowing demand is indicative of opportunity for investors, however, the PBSAs in the development pipeline are considerably low.

2.The Growth of Purpose-Built Student Accommodation in Australia

The rapidly changing market is becoming a haven for investors as more and more students prefer to study in universities across the world, despite increasing fees and inflation. The Purpose-built student accommodation, also referred to as PBSA, is a safe investment opportunity owing to its defensive nature towards any type of economic crisis. The primary indicator of the same is the constant increase in the number of students travelling to Australia for higher studies.

• Australian PBSA yields have trended lower over the past ten years, similar to other commercial sectors. Since then, however, the student housing market has emerged as a recognized institutional asset class, overcoming the past compression due to its staggering growth in recent years. The creation of high-quality products is expected to increase liquidity, hence opening doors for more profitability in the long run.
• Even after the setbacks caused by the pandemic, remained rather stable in the Australian PBSA market and there was a higher return in most of the major cities in the country (as shown in the figure below). This was due to the possible long-term returns on their investments in the Australian market.
• According to Bonard's report, the rents for purpose-built student accommodation in Australia rose by 8% in Australia last year which makes it a great investment opportunity as the demand is steady – even with the continuous rise in the rents due to inflation and shortage in supply. This makes for a profitable space for investors to expand their portfolios in the asset management market.

As per JLL’s Australia Student Accommodation Report 2022, one of the other differentiators for the Australian market is that it has less number of on-campus or university-affiliated residences. Furthermore, for the better part of the last 15 years, the country has relied on the private sector to keep up with the growing demands due to the influx of international students. Similar to that in the UK, Australian universities are inclined towards partnering with experienced PBSA operators.

With Australia gaining popularity amongst students for pursuing higher education, it creates more demands for beds and rooms. The shortage in supply can ensure the investors of profitable returns.

3. Changing Dynamics of the Australian Student Accommodation Market

The dynamics in the Australian PBSA market are changing rapidly as the market is in its growth stage and is becoming more organized. Here’s a quick overview of the major changes governing student accommodation in Australia:

1. Market Valuation: The Australian PBSA market is at a stage where it is continuously consolidating, driven by both increases in infused capital by institutional investors and economies of scale on the operating platforms. According to the Global Student Housing Report by amber, the Australian PBSA market has a market valuation of US$ 3 billion, the largest on the global front.
2. Portfolio Expansion: Major financial sources and operators have increased their exposure to this sector over the past few years through the purchase of pre-existing assets, portfolios, property management platforms, and development sites. Recent transactions have shown that these trends are still present, with capital market activity rising as the sector returned to normal in late 2021.

As the student housing market has been seeing a huge influx of capital from institutional investors for the past decade, Australia has become a beneficiary of capital deployment. The increasing returns have exposed Australia to an immense amount of capital inflow going towards student accommodation investments.

For instance, Scape, the largest PBSA owner in Australia, added three properties (a total of 428 beds) to its portfolio in late 2021 after acquiring them from the University of Technology, Sydney. To quote another instance, in the middle of 2022, GIC boosted its exposure to the Australian PBSA market by acquiring a 49.9% share in the Wee Hur PBSA Master Trust for the expansion of its portfolio (Source: JLL).

4. What’s the Transactional Outlook for Student Accommodation in Australia?

As more investors get drawn towards purpose-built student accommodation in Australia to reap higher returns, there are a few transactional aspects to note.

• The consistent returns in the Australian student housing market have drawn property operators’ interest. Many managers are looking for growth opportunities in this sector due to its returns as compared to other real estate asset classes.
• The supply of beds is unable to keep up with the exponentially rising demand from students. On the other hand, the market is rather unaffected by inflation and other economic turmoil. As a result, investors may favour portfolio purchases to gain access to instant scale, preferably in conjunction with development pipelines. Evidence from other countries and recent Australian sales show that platform and portfolio acquisitions carry large premiums.
• Moving further, Brookfield, a global alternative asset manager is planning to step into the Australian market. It is doing this as a joint venture with Citiplan as they have already acquired a PBSA development site opposite the University of Melbourne. Together, Brookfield and Citiplan want to create a platform of premium student housing that will be run by Journal Student Living - a seed investment that is expected to convert to $500 million worth of assets in the pipeline. The platform aspires to supply top-notch PBSA assets in significant gateway areas throughout Australia and New Zealand.

The major players in the Australian PBSA sector are continuously investing in the development of new beds and properties in collaboration with local builders and building student accommodation from the ground up. By diversifying their capital investments across global markets, buyers can see that the returns from student accommodation in Australia are higher in comparison to the yields from the other core sectors.

Conclusion

The Australian student housing market has shown immense and promising growth in the past few years. The market demand for accommodation in Australia for international students is being shaped by the changing preferences of students who are eager to explore new offshore campuses rather than traditional ones. The international applicants in Australia are projected to grow by 20% by the year 2025 according to the Global Student Housing Report by amber.

Due to its relative value, geographic diversification, and the chance for operators to slowly expand their platforms, it is expected that the market is all set to grow at a staggering rate with the rising number of interstate and foreign student enrollments for higher education in Australia. If you are looking to tap into the potential of student accommodation in Australia, do list with us at amber!

‍