Resilient demand and constrained supply are expected to sustain rental outperformance in key university cities, according to the most recent DWS Alternatives Research. Here is a brief overview.
Following several years of pandemic-related slowdown, recent investor surveys1 show that student housing is back at the top of investors' wish lists. Undersupply is a feature of most European markets, and demand continues to rise. Educational attainment rates
are still growing in many European countries, particularly in Southern and Eastern Europe. In addition, international students continue to find Europe an attractive study destination due to the concentration of high-quality universities and cultural offerings. Tertiary attainment rates are also increasing rapidly in countries like India, resulting in intense competition for university places and making India one of the fastest-growing exporters of students to the U.K. As a result, the sector has seen strong rental growth, which is likely to continue for the next few years as demand/supply imbalances persist.
At a time when market uncertainty is at a cyclical high due to rapid rate hikes, geopolitical tensions and the possibility of a recession, investors are looking for sectors which offer resilience through economic cycles. Student housing returns have tended to be less sensitive to economic cycles in the past. In the UK, where data goes back to before the Global Financial Crisis (GFC), rental growth increased in 2009 when real GDP growth fell by 4% as the newly unemployed returned to education or existing students chose to prolong their studies. The correlation between student housing and GDP is weaker than for offices, offering the potential to boost portfolio performance during an economic downturn.
Demographic trends are also a supporting factor of student demand, although this is not true for every European country. The U.K., Sweden, Spain, and Poland still have strong growth in the number of 15-24 year-olds over the next decade. Most other European countries have some growth, while the Netherlands, Denmark, and Portugal are forecast to see numbers of domestic students decline. Attracting international students by offering English-taught programmes will be important for universities in these markets to sustain student numbers.
The other main part of the equation is supply. Except for a handful of UK markets, most of Europe lacks a supply of student housing to meet demand. In Italy, Poland, Portugal, and Spain, the issue is particularly acute. In Milan, in early 2023 there were even student protests against the exorbitant rental prices students faced in the city.
The final area to consider is liquidity. In 2013, investment into student housing in Europe totalled €3.5b but by 2022, this figure was over €15b. While this still only represents 5% of overall real estate investment volumes, the growth is significant. A major source of this development in the market has been the growth in investment opportunities in European markets outside the UK. Ten years ago, the UK represented over 80% of investment volumes in the student housing sector in Europe. By 2022, this figure had fallen to two-thirds of the total, despite a rise in total UK volumes.
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