Mapletree on hedging inflation with student accommodation

Student accommodation is a scalable opportunity with inflation-hedged cashflows, says Mapletree deputy group CEO Chua Tiow Chye

This article is sponsored by Mapletree Investments

Student accommodation has come a long way since the gloomy halls and shabby, sparsely furnished flats many will remember, and has become an attractive asset class backed by strong underlying counter-cyclical fundamentals.

Singaporean developer and investment manager Mapletree has been investing in the sector since 2016 and now has a portfolio of more than 24,000 beds across 38 cities. It also
has a private real estate fund with 35 assets and is targeting to grow its student housing assets to $10 billion over the next five years. Deputy group chief executive officer Chua Tiow Chye considers the sector’s unique qualities.

Chua Tiow Chye

Why is the student housing sector attracting interest from real estate investors?

The student housing sector has gained strong interest, especially from institutional investors, as it has stable and secure income streams. This is underpinned by strong underlying fundamentals with attractive student demographics and a relatively low stock of high-quality student housing, not only in the main markets of the US and UK, but also in several higher education markets around the world.

We see the immense opportunities of diversifying our portfolio as well as the potential for scale. Student accommodation used to be largely a ‘mom and pop’ business with a few private investors involved. Students also used to stay in typically older, unamenitized, sparsely furnished dorms on campus. More student housing specialists have entered the market in the UK and US, but most markets are still undersupplied with student housing, and especially so with high-quality, well-managed accommodation.

This reinforces the demand for high-quality student housing operated and managed professionally as a separate, specialized asset class. As an indication, the student-to-bed ratio in the US and UK markets is around 2.5x.

There has been a great increase in the number of investors and operators since we became involved in the business, and this has compressed yields. When we first entered the UK, capitalization rates were as high as 6-7 percent, but have since dropped to sub-4 percent in London and slightly higher than 4 percent in the UK regions.

In 2021, student housing experienced a near-record transaction year, exceeding $10 billion in investment sales volume, according to CBRE. This more than doubled from 2020.

The student housing sector’s resilience during downturns has proven to be one of its main attractions to investors. Student accommodation has a track record of being relatively recession-proof when compared with office or retail asset classes, as well as being an inflationary hedge in periods of rising inflation due to the dynamic pricing of rates (with tiers) and shorter-term leases to tie in with the academic periods. This sector has also since seen a strong rebound post-pandemic, given higher student application numbers, driven by both deferred admissions and a successful rollout of vaccination programs.

Over the medium-to-long term, the outlook for the student accommodation sector continues to remain fundamentally attractive due to demographic growth, rising participation rates for higher education and supportive government policy to grow enrolment levels. Another aspect is that international students are a critical source of funding for universities.

Why is the cashflow profile of student accommodation unique?

Unlike commercial real estate sectors, the student accommodation properties lease to students who sign shorter leases in tandem with the academic year. This means a shorter weighted average lease expiry compared with the office or industrial sectors.

However, the sector starts marketing the beds as early as one academic year before, so with renewals, there is good visibility of pre-leased cashflow for the coming academic year. There is also greater certainty to a steady cashflow as it is supported by parental guarantees or the government and, in the case of international students in the UK, usually paid upfront and in advance.

The nature of the cashflow has an inflationary hedge in-built, where in periods of rising inflation the dynamic pricing of rates can be used to offset this impact.

For student accommodation, rates can be adjusted each year, or over even shorter time periods, to account for rising costs, while balancing affordability for students and parents. It is more dynamic and flexible in taking inflation and rising costs into account. In the current global inflationary environment, this will be even more valuable.

Which markets are of the most interest to investors?

The two main markets we are targeting are the US and the UK, because these are the top choices for overseas students as they have the most top-ranked universities. The US has a huge domestic market, so overseas students are a relatively smaller percentage of our residents as compared with the UK.

The US and UK continue to be the largest and most liquid markets we operate in and where we will look to scale up, because of the strength of our platform and the opportunities we see there. We can buy small or large portfolios, as well as individual assets. On top of these, we are also able to undertake greenfield developments.

To tap these opportunities, we have developed local teams and management with the right operational knowledge. The US and UK have accounted for more than two-thirds of global transactions per annum since 2011.

At the same time, continental Europe is very interesting. Previously, many European students studied in the UK, but this has somewhat declined due to Brexit. Furthermore, European universities are trying to attract more overseas students by offering courses in English. Overseas students are more inclined to seek purpose-built and professionally managed student accommodation as they are less familiar with the cities and markets.

The other two markets where we see opportunities are Canada, which has many good universities teaching in English, and Australia, which is the prime choice for many prospective students in Asia. Unfortunately for Australia, over the last two years the sector has underperformed, driven by covid lockdowns, but is now gradually reopening. We are therefore putting in a concerted push to enter that market.

What are the options for an investor looking to expand in this sector?

There is greater competition for existing assets and the cap rates have compressed substantially, but there are also development opportunities. There is still a shortage of specialized, high-quality accommodation so development is a good option to bring better stocks at higher return to the market.

In the UK, the planning regulations for new student housing develpoments are very restrictive. Demand for better design and specifications as well as the need to provide more amenities are also drivers for new development.

Whereas in the US, the development market is different as there is more land available and selecting sites within walking distances to the university campuses is critical. Of course, developing the assets by ourselves means that we get the higher yield on cost rather than acquiring existing assets from the market.

How important is ESG in this sector?

ESG is very important; we are fully committed to our ESG journey and will finalize our net-zero carbon plan for the business over the next few months. There will also be individual plans for our business lines to address the ESG factors.

For this particular sector, we will carry out environmental due diligence when acquiring assets, understand the building’s energy performance, set up plans for improvement and compliance with energy standards, and attain green building certifications. This will be part and parcel of each asset plan.

Everyone needs to play their part in ESG. While we will carry out work to, for example, add sensors and LED lights, install solar PV panels and plant trees, we need the property managers to keep an eye on energy efficiency and encourage more environmentally-conscious conduct in our residents, eg, turning off the heating and air-conditioning when they leave their rooms. To supplement this, we are looking at technology solutions to help us.

There are also more opportunities in this sector to work on the ‘S’ in ESG, which we have been doing through our corporate social responsibility program, including community work and projects that benefit residents and the wider community. This ties in with the work our ground teams put in during covid to ensure our residents were well looked after from the health and safety aspects.

What particular factors are involved in being a manager of student accommodation?

Compared with other real estate sectors such as offices or logistics, there is a far greater operational element involved in managing student accommodation. Hence, we need a responsive and experienced operational team. If operations are well executed, this will ensure that residents are satisfied. There is a peculiar challenge in dealing with our residents, as they are typically young adults and have very different needs from a corporate tenant.

This was very apparent during the covid-19 pandemic, which was a tough time for our property management staff. We had to quarantine residents in the buildings and frequently checked in to make sure everyone was doing okay. However, having this arrangement was a comfort for the residents and their parents. Hence, the health and safety needs of our residents are of the utmost importance. Aside from buying or building well, we need to manage and operate our assets even better.