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An asset class with potential for growth

Student housing – properties for the education and urbanisation megatrends

A new record was reached in 2019: never before have there been so many students in Germany. Nearly 2.9 million are currently enrolled in German universities, an increase of 37 per cent in the past ten years.

Studying has not only gained popularity in Germany, student numbers have been climbing all over the world in the past decades. Forecasts suggest that approximately 250 million people will be enrolled in universities in 2025, and an end to the increase is not in sight.

With universities mostly located in cities, students are enhancing a trend which has also been generally visible during the past decades: urbanisation, which is making it increasingly difficult to find appropriate housing – not least due to the students having to compete with young professionals, commuters, and an increasing number of one-person households all searching for the same kind of housing: compact, central and well equipped.

Strong demand for micro-apartments

The property sector has reacted to the increase in demand for compact urban housing, building more and more micro apartments, i.e. generally speaking, one-room flats of 20 to 35 square metres with a living area, bedroom, bathroom and kitchen unit all in one. Demand for these micro apartments is so high that market observers are already calling the trend 'a new star on the property market'. These flats are more than just housing, they are an expression of a new attitude towards life, fulfilling the need for a community, and the requirements of co-working, sharing, new work, flexibility, and mobility.

The concept student housing has been developed with students in mind, offering an all-round service in line with their needs which traditional student housing complexes don't offer. Examples are a laundry and cleaning service, a gym, terraces, restaurants or libraries. Furthermore, these new premium housing complexes boast a reception offering multilingual information nearly 24/7 – almost like at a hotel.

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More information about student housing property Infinity Place

An attractive asset class

However, not only students value student housing: property investors have also discovered micro apartments as a highly attractive asset class, since such an investment generates not only steady, but also high income. On average, micro apartments deliver higher returns than the usual two-, three- or four-room flats, as they generate higher rents per square metre. Moreover, the restrictions imposed by official rent tables (Mietpreisspiegel) and legal caps on rent levels (Mietpreisbremse) do not apply to furnished dwellings let for a limited period.

Another advantage micro apartments for students offer is that most properties on the market have recently been built or are currently being built, whereas existing buildings usually do not provide the infrastructure necessary for the student housing concept. Thus, the properties we are dealing with here are mostly new buildings reflecting state-of-the art technology and developed in line with modern standards.

Other advantages for investors:

1. High cash flow, since rents are usually paid in advance

2. Flexibility regarding rental structure due to frequent tenant change

3. Low cyclicality, since education and urbanisation are longer-term megatrends

4. Low tenant default risk due to high demand (also from other target groups) and fast tenant change

A growing market

The share of micro apartments in the housing market has grown strongly in the past years. Whilst a few years ago micro apartment investments were a niche market, today they represent an individual asset class. Micro-living markets have been established especially in Germany, France, Great Britain and the Netherlands, providing established market structures with numerous investment opportunities to interested investors. In many other European countries, these markets are only just developing – albeit at high growth rates.

Discussion with Bettina Graef-Parker

Magazinartikel Wachstumspotenzial Graef Parker 1X1
Managing Director Special Property Finance, Aareal Bank AG

Ms Graef-Parker, which countries already offer attractive investment opportunities in the student housing market?

Student housing has become an attractive asset class in almost all countries with fast-growing university towns. However, market maturity is definitely highest in the Anglo-Saxon countries, followed by some markets in mainland Europe. In the aforementioned markets, student housing investments have already become an individual asset class.

Which role does student housing play for Aareal Bank?

We entered the student housing financing market a few years ago, and financed a few properties in 2018 and 2019. For instance, in May 2018 we were part of a financing syndicate for seven student housing complexes in London, and one each in Bath, York, Brighton and Edinburgh. In June 2018, we participated in the refinancing of three premium student housing properties with a total of 1,742 beds in central London. And at the beginning of September 2019, we invested around AUD 55 million in a three-year financing project for the student housing complex 'Infinity Place' in Melbourne.

What are your plans for the student housing market?

We believe that this market is very attractive; our experience with the aforementioned financings was very good. Interestingly, several studies show that student numbers increase during recessions, making student housing complexes very interesting financing objects due to the combination of high cash flows and their counter-cyclicality. Not least for this reason we are aiming to expand our global market share in this segment.

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