AMERICAS NEWS: Learning curve

The recent launch of two funds seeking capital to invest in off-campus student housing raises not just eyebrows but also questions. In particular, has investor demand grown in this space? More importantly, is there enough demand in this oft-ignored property type to justify two commingled vehicles hitting the market at once?

Not only are Harrison Street Real Estate Capital and Kayne Anderson Real Estate Advisors (KAREA) hitting the fundraising trail at the same time with vehicles targeting off-campus housing, both funds have more ambitious equity targets as well. Although the firms declined to comment on fundraising, both managers are seeking more capital over a shorter fundraising period than their prior vehicles—Harrison Street is targeting $600 million by year’s end and KAREA is seeking $700 million by May.

So, why are these two firms so confident in increased LP demand in student housing? Based on various sources, the answer appears to be rather simple: the sector is showing strong and steady growth.

“Over the past decade, the student housing market has started to emerge as a mainstream investment category, attracting significant interest from investors, developers and private operators,” stated a November 2012 report by Jones Lang LaSalle. The report, entitled Student Housing: A New Global Asset Class, added that the US is one of the most attractive markets for the space, with investments in 2012 reaching roughly $2 billion. Fundamentals, which include low supply and high demand, have delivered average returns between 11 percent and 15 percent.

According to the US Department of Education, student housing demand is steadily outstripping supply in a large number of markets, with many public universities experiencing 2 percent to 5 percent annual enrollment growth. While enrollment at public universities has grown, the existing supply of on-campus housing has failed to keep up and off-campus housing construction all but stopped from 2008 through 2010. Although new construction activity has since re-started, the continued growth of many public universities during that period exacerbated the dearth of supply.

In addition to these strong fundamentals, Harrison Street and KAREA have the advantage of considerable experience in the sector. Indeed, student housing is a niche market that many GPs have either dismissed or ignored. Said one source familiar with the property type: “While there is strong demand from LPs, there are mistakes that can be made by those new to the space or those that view the sector as a quick in-and-out trade.”