Talking Property | Student accommodation in the spotlight

KH:
Hello and welcome to CBRE’s Talking Property podcast where our team of experts, our clients and industry specialists share insights into the way we live, work, and invest through the lens of commercial real estate. I'm Kathryn House CBRE's Australian Communications Director and I'm your host for this latest Talking Property episode. Today we'll be discussing Australia's student accommodation sector, which has been in the spotlight as international students return to our shores and as investors circle opportunities to get set in what's rapidly become one of the country's most sought after alternative asset classes. There are currently around 60,000 purpose-built student accommodation beds across the country, allowing students to live on or near university campuses. But the sector is facing the same supply crisis being evidenced across Australia's broader housing market. Just 8,000 purpose-built rooms will be delivered across Australia between 2023 and 2026 according to new CBRE research, with demand expected to well outpace supply. 

At the same time, investors are circling the sector given its strong underlying fundamentals, namely the fact that education is Australia's largest non-resources export and the country is a top four destination for international students, alongside the US, the UK and Canada. International enrollments have also recorded a strong post Covid bounce and there's a clear growth trajectory. So, what does the future hold? What measures are needed to address the current supply shortfall, and how can investors access what's shaping up to be one of Australia's most dynamic property asset classes? To help answer these questions, I'm joined by Anouk Darling, the CEO of Scape, one of Australia's largest student accommodation owners and operators with over 16,000 beds across Sydney, Melbourne, Brisbane, and Adelaide, and another 12 buildings in planning and development. I'm also joined by Alex Crossing, the Asia Pacific Regional Head of Indirect Private Real Estate at CBRE Investment Management, a group investing in student accommodation across the globe. And, last but not least, by Sameer Chopra, CBRE's Pacific Head of Research and the author of CBRE's recent Accommodating the Growth in Students Research Report. Thanks for being on the program Anouk, Alex and Sameer. Sameer, perhaps if I could start with you, could you give us a quick rundown on your recent student accommodation report, some of the key takeaways and the calls to action? 

SC:
Yes, thanks Kathryn. Look, Australia's a very deeply underpenetrated market. You know, we've just got one purpose-built student accommodation bed for every 16 students out there. Just to put that in context and in the UK that same ratio is, one bed for every two to three students. So, the Australian market can sort of 4x from here and will broadly match what the UK looks like. There is some supply coming, but supply is just 7% of existing stock. So, you know, it'll hardly make a dent in the overall demand and supply imbalance. Most of these beds are in very close proximity to university campuses and my own sort of private conversations with university providers suggest that demand for international students could easily grow by at least 25% from today's very elevated sort of levels. It's being sort of held back just to make sure the students get a very good experience, and you get more sort of diversity in country of origin. 

The other things we've found, Kathryn, is that our own data showing that rents for student accommodation grew at 5% per annum from around $400 to around $530 per week over the last five years across most cities. So, you know, it's a pretty consistent, good, solid rent growth story. And you know, whilst pricing yields have expanded by about 30bps off their sort of mid 22 lows, it's showing up to be quite resilient in the face of these increasing interest rates. So, I definitely see strong interest from capital that wants to sort of participate in student accommodation. 

KH:
Thanks Sameer. I think that's a really good scene setter and probably a good segue to Anouk. You joined scape in 2020 and navigated the company through a global pandemic - I can't even imagine what that would've been like - while advocating for the return of international students to Australia. What's your take on the current landscape? I did see you recently quoted as saying that it's been a slingshot from zero to hero for the sector over the past 18 months. 

AD:
Thanks Kathryn. Yes, and perhaps if I start with a zero then I'll paint the context of the hero. So, if we cast our minds back under a prior regime with our previous PM, he actually told all the international students to go home. The sector was very full. It was, you know, off the back of 2019 we had record student lodgement numbers, and I was invited, I think it was June 21 to a private home. It was a dinner of seven of us with the pm and my daughters did counsel me before I left the home and they said, mum, don't have a drink and don't tell the PM what you think of him. Well of course guess what happened, but he wasn't reelected and thankfully we are seeing now with the borders open absolutely a very different macro environment. We are past sort of the peak student visa lodgement numbers that we had in 2019. 

Tech’s helped with that by mandating a return to face-to-face learning. Obviously, China came out earlier this year and said that, you know, degrees would not be recognised back in China for employment if they weren't completed in person. So that's definitely helped change the landscape. But we’ve also seen domestic mobility change. So, students are actually traveling interstate. So, previously I think it's gone from 4% to 20% right now. So that's for instance, i.e. I grew up in Sydney as a student, but I moved to Melbourne to do my studies. So, we've got domestic mobility, we've got the student enrolment migration numbers lifting, we've got the lowest vacancy rates on record, you know, we're sub 2% and in fact I think it's about 1.1% nationally as an average. And now we're looking at a sector that's got top line rental growth, sort of outpacing inflation. So, it absolutely is an exciting time to be here, and the sector is pretty full. I think right now we have been sling-shotted from a very treacherous position of nearly empty, and you can imagine over two years of lockdown, to now being at 98% capacity. 

KH:
That's such an amazing change in a relatively short period of time. But great to see that that's happening. And it's interesting you talk about that domestic mobility, it's sort of following I guess the trends we see in other countries. You know, if you look at America, most students don't actually stay in their home cities or states to go to university or college. So interesting to see that that's happening here now as well. 

AD:
I think Australia's only just catching on as a trend, you know, particularly the US moving out and moving to college was a rite of passage, whereas in Australia it's typically not unless you go to a university college. The other thing I will just quickly add, I know we want to move on, but one question that investors do ask us about a lot is about geopolitical risk. We’re seeing a lot of the student demand is coming from China and having just returned from China myself only a couple of weeks ago, Guangzhou, Shanghai, Beijing and meeting with all the leading aggregators and independent agents who place students, the demand profile is not slowing. Australia is still up there; our university rankings are lifting and that makes us highly attractive, and Australia is still seen as a very attractive and safe place to send students. So that demand profile is absolutely there. 

KH:
And I guess that's one of the things that's encouraging investment Alex. At CBRE Investment Management you've been actively investing in this sector globally and in Australia, I know you're invested in a joint venture with Cedar Pacific that has three PBSA assets in operation and two in development. I'd be really interested to know why CBRE Investment Management is targeting the sector and the potential you see both locally and globally. And I guess how best can investors access this market? 

AC:
Sure Kathryn. I suppose we entered the market or started looking at the market in 2018 and entered it in early 2019. We had been investing in PBSA in the UK and Europe for a number of years in both core funds and developed core programmatic ventures to create product. And we've been seeing the increasing institutionalisation of the sector and cap rate stay and compress over time. And looking at the Australian market, we saw that there was, given Australia I think is about the third behind America and the UK as a destination, we thought there were a lot of interesting supply and demand fundamentals. The metrics made a lot of sense because of the low supply provision rates as the industry calls them. Sameer referred to the demand story was very strong, and we saw attractive spreads between yield and costs for our developments and in place cap rates. 

And since then, the cap rates have compressed as well. So, there are a lot of interesting drivers that indicated to us that this would be a good time to come into the market. Anouk’s talked about the differences also here in Australia, as well as you, about the domestic market starting to relocate. But that is something that's quite different between the UK and the US. As Anouk mentioned, rite of passage or everyone looks to relocate for Uni so that sort of waiting towards international students as opposed to domestic is much higher here than in those markets where we invest. What's interesting, each of the markets has different demographics domestically going on when we look at them. I suppose the interesting one for the UK and why it's particularly interesting is that the 18-year-old cohort is expected to significantly increase from now to 2030, sort of double-digit percentages. 

AC:
And this is having a big impact on demand for university education and therefore residential. So that's made it quite interesting, it continues to be an interesting market for us in the PBSA space. It's very strong from an occupier fundamentals perspective as well as from the supply side it's been very limited. My colleagues have told me that development's actually down 40% in PBSA in the UK on pre-pandemic levels driven largely by cost inflation from construction plus the debt costs and also meaning that the economic rent is just becoming too high. I asked when I was looking at the impact of Brexit, it was interesting to see that from an international perspective you've seen EU numbers come down somewhat, roughly about 30,000. However, the growth of non-EU students coming from China and Nigeria and India has probably more than offset this. And in fact, in Australia, China and India are some of our biggest markets for PBSA. Looking at the US, well probably maybe I should stay close to the UK, Europe, we've been investing in PBSA there since 2016, 2017 we started then and we've built up a considerable exposure in Spain, Germany, Denmark, and the Netherlands. 

But what we saw over time was cap rates were starting to compress as the sector institutionalised and it got more mature, and we started getting a little concerned because PBSA yields were getting very close to residential yields in a number of markets. And so, whilst we felt very positive about the operating fundamentals, pricing was becoming expensive and with that in mind we decided it was time to probably exit. So, we actually exited out of PBSA in Spain and Germany in 22, take some money off the table. And fortunately, that timing was in our favour because it's been obviously with interest rates quite a change in pricing. But overall, and I suppose that's the difference where the operational markets and the capital markets, but we're still seeing PBSA as an attractive sector in Europe to invest because of that outward shift in yields, now pricing’s starting to get more attractive again. 

AC:
And so, we're actively looking to re-enter across Europe, which will be quite exciting. And just probably touching on the US, the last other major market where we invest, what we are seeing there is our research is really seeing a bifurcation of the sort of winning universities, the larger ones that since Covid are really getting, we're seeing students consolidating post pandemic at these larger universities and they're getting the lion's share of funding versus some of the smaller universities or two-year colleges. So, we've been focusing very much on university markets with low acceptance rates as that provides an additional risk buffer to enrollment because we know that they've got plenty more who haven't been accepted, who they can turn to if there are any reductions. And what we are seeing on the ground already, for instance, is pre-leasing is extremely positive because like us, the US is seeing a shortage of general housing in many of these markets. So, it continues to be something we're interested in. We are invested in the US at the moment, and we'll continue to monitor that market. I suppose like here, PBSA is probably still viewed as a higher-end product. So, in the US we look very much at the affluency of parents because it's much more of a domestic driven market in the universities that we target. 

SC:
Yeah, look, just a question from me as well. You know what comes up a lot is the importance of student security. One of the things parents look for, I'm a parent, is the security for the child. And then the second one is amenities, like back from the students, their demand is ‘what else is included?’. What sort of community, it comes up that one of the things that's been missing in universities during this sort of Covid period is this connection and kids are looking for this community. So do you think that student accommodation that caters to these can be expressed in both rent and price. Do you think both of those come into play? 

AD:
I'm literally jumping out of my seat Sameer to answer this question. So yes, we know from our research that for parents, the number one issue is safety and security. From the students, it’s like how good is it going to be for me? And we do know absolutely that everyone needs to have a sense of belonging and I think really, I need to paint the picture of what PBSA, purpose-built student accommodation, looks like to take you into that world. Because honestly until I saw it, I did not believe it, based on my university experience and flatting with friends and you know, terrible shared apartment. We have buildings that have amenities that include things like a gamers’ lair with state of the art, you know, gaming machines. They have recording studios for podcasting. We have soundproof music rooms with mixing desks and electric guitars and baby grand piano and electric drum kits all provided for them. 

We have something called a glam room, which is when everyone wants to get ready before a big night out, they can get together and it's Hollywood mirrors and changing rooms and hang together before they head out for a night out. But most importantly we've got 114 different nationalities that live with us across our portfolio. So, we have a huge amount of cultural awareness, assimilation and events and activities. So, these kids can socialise and meet each other. And because of our scale we're able to do that across precincts, not just in buildings. So we can have events and activities where we might be taking them canyoning or mountain biking or skiing in winter or jumping out of airplanes or even something as small as, you know, cooking a theme night in the building or celebrating Diwali or something that they can all participate in and meet each other and socialise in a way that that's safe. 

AD:
That they can learn respect for different cultures, respect for different people. And it’s bringing everyone together, which is highly unique. So, is there a value price trade off? Yeah, I think so, absolutely. And where PBSA at the moment gets criticised is it gets compared to the residential rental market and they'll see private student accommodation and they’ll see, you know, a studio apartment. I'm just making it up, say the average weekly rent is $518 nationally in the private student accommodation. However, in the residential market they're saying they could rent a room for between $200 and $300. Now they're just renting a room. That is it. With us there's 24/7 pastoral care, there's cultural assimilation. We also have programs like Scape’s Got Talent, which is actually helping them into the workplace if they need to have secondary jobs outside of uni. We have people signed up that can work with them. And we have a huge amount of technology overlay in our buildings that across the portfolio there's almost 2000 cameras where we are making sure that no one's coming in that's meant to be in and that the kids that need to be in are in and safe. 

We have density checking, we have door activity, we have wellness trackers if kids are sort of intimating that they're not having a great time, they're not assimilating. So obviously everything else is included.  Wi-Fi, utilities and everything else that comes within it. So, there's nothing that is comparable to a residential rental experience across PBSA. And that's where it gets very different because you see the headlines and the media and we're often beaten up about, you know, it's unaffordable but if you want your child to be safe and you want to know that they're in care, you know there's someone wrapped around them introducing to a new culture and to a new environment and they're having new experiences, then what price is that? And then also if you just let them go into residential and all of a sudden, they've gone, I want to join a gym, I need to join x club, I want to get a gaming console. Oh, I forgot about the utilities, et cetera, et cetera. It's all going to add up on top. So really, I think, you know, it's marginal but I don't think you can price the value of that safety and security and the experience that we bring. 

KH:
Hmm. No. And my son decided to move out of home in his last year of university into the private rental market and lasted 12 months and came home with $20 left in his wallet. Blowing all his savings. Having not factored in all the things like Wi-Fi and utilities and yes so, but yeah, I'm sure he would've liked the gaming lair that Scape has. So, I guess, taking another step back and it's really great to get that feel for it because I think people wouldn't necessarily understand what these PBSA apartments actually look like. But, we are seeing that the sector's facing some ongoing challenges. So, there's regulatory issues, you know, taxes, planning hurdles. And I think that's not just something that the PBSA sector is facing, but I'd love to know what's one key thing you'd like to see change to help drive the growth of the sector in Australia? And perhaps I could start with you Alex and look at it from an investment perspective.  

AC:
Can I have two things? 

KH:
You can have two things absolutely. 

AC:
Well one, to date the sector, there's been some investment from domestic institutional investors but pretty limited. The bulk of the investment into the sector and what's been developing a lot of the supply in recent years has all come from foreign institutional investment because it's been institutionalising elsewhere. And so that money is now looking at other markets where there are opportunities. And right now, as a foreign institutional investor, if you're a pension fund or insurance company, when you are buying land for residential purposes, that can be turned into PBSA you are treated as though you are a foreign resident who is going to take a residential property away from an Australian resident and therefore there are all these additional surcharges on stamp duty, on land tax and the like. Whereas it would be good if it could be seen, PBSA could be seen as commercial residential, which I understand is a definition under the GST Act. 

AC:
But if more broadly across state, local and federal that the sort of the concept or definition of commercial residential could be used to recognise like BTR and other forms of residential real estate, that it's not taking a home away from a domestic resident who wants to buy their home. It's for a different purpose and it's providing, in a way, it's providing probably rooms for just students that might otherwise have to go into the residential market and compete with domestic residents, all sorts of domestic residents for space. That's one of the things I think would probably level the playing field and make it more straightforward, less complicated and open up some markets that have been underserved because of these additional surcharges and the approach taken. But I appreciate foreigners don't vote so it's not always a popular one. The second thing that would be great to encourage wider institutional investment from domestics as well would be to look at expanding, I suppose the definition of the current benchmark that's used in your future. 

Your super. It does for domestic real estate specifically refer to the MSCI Wholesale Funds Core Index, which currently has quite a strict criteria around certain things like leverage and also to date is only office retail and industrial. So, it is not to go into a sector that's not in the index, which might be a good diversification play within your portfolio and generate better risk adjusted returns overall, you are not incentivised because it is not currently part of the sector because the sector is limited to existing funds. And I suppose that's something, it's not an easy solution, but finding an appropriate benchmark that actually reflects how super funds and how pension funds globally are investing in real estate both in their home markets and offshore. That's something that ideally would help to develop more interest and make it well, less barriers to entry for domestic investors. 

KH:
Absolutely. And Anouk, I'd be keen to get your thoughts. I know when we were talking the other day, you've got a view on wanting PBSA to not be considered as an alternative asset class. I won't pigeonhole you into that being your answer, so you might have something else, but what are your thoughts? 

AD:
Yeah, and I think, you know, after Alex's response it's kind of like, well can I have those two as well please? But it's true, we aren't on the index for the super funds and so therefore we sit within alternates and therefore there's only a certain percentage that can be allocated to the alternate asset class despite us being institutional grade. Now if you think about, you know, there's 76,500 beds, the contribution to the economy, we underwrite Australia's largest service export, which is international education. And not only that, our students spend more than the average household in the economy per month, which is approximately $4,000 per month coming to the economy across those hundreds of thousands of students. So, it's a little bit frustrating that we are not recognised as an institutional asset class, which does hold back the domestic capital. 

I mean, I joke and I've said it in a forum and I'll probably get my knuckles wrapped because I know I'm always a little bit disruptive, but when I think about the Australian Super funds, you know, it reminds me of the Australian tourism ad with Lara Bingle back in the day that ran in the UK and it's like, where the bloody hell are you? It's sort of an empty echo out there for PBSA attracting domestic super. There are very, very few invested. While they're invested in PBSA offshore for a number of reasons that Alex has just explained to us. So yes, it's a little bit frustrating because of course we want domestic capital, particularly Scape. We're an Australian company, we're proudly Australian, and then we have attracted some of the largest global property pension funds in the world. And even though we're Australian and we're buying in Australia, we don't sell anything. 

AD:
We employ Australians, we create jobs through the building industry with all the taxes that relate to absentee owners, surcharges, et cetera. And right now, government is not joining the dots at a federal, state or local level around all the changes in the tax system and the secondary effects, or the unintended consequences, that is impacting the sector. So, when even from last year to this year, I'm looking at the statutory and taxes change in the states going up significant percentage points to the point where they're nearly at, you know, 20% of operating costs. Now it's just not feasible. So, a lot of work's being done around awareness and lobbying and a lot of it is unintended consequences. So, I think it's sort of, for me it's, there's a number of issues. You know, of course, yes, I want a different tax regime. 

There's a new asset class called build-to-rent and I don't think PBSA should be in any less of a position than build-to-rent. And yet all of a sudden the government's saying, oh you know, build-to-rent can have 15% MIT and we might even look at X, Y, Z and here's PBSA that's been here underpinning and taking the pressure off the residential rental market but not given the same lens. And so that's why I get frustrated about the alternate because if we're seen as institutional, then I think people would be sitting up and taking a bit more notice. 

KH:
Yes, absolutely. It's interesting you make that point about BTR. It seems to dominate a lot of the headlines. 

AD:
And there's literally about, you know, 4,000 operating beds against 76 and half thousand with a more sophisticated asset class that's buying, building and developing. So, if anyone's going to alleviate the pressure at speed, it's going to be PBSA ahead of BTR and we're in both, but the growth is in both sectors. However, PBSA is probably in a better position, but I don't know what Alex and Sameer think about that. 

KH:
Yes. Sameer, what's your view, what's your one or two things that you'd like to say?  

SC:
Yes, we just need to be careful about unintended consequences. One of the things I like about the sector is dynamic pricing. I think the sector is very unique in that prices do move around for rent depending on demand and supply. So, I would like, I think ideally for the government not to sort of get involved in that space and let the sector set the pricing in a very sort of dynamic manner depending on demand and supply. And that comes down to these unintended consequences. The more you regulate and the more you try and set up things like pricing, the more you'll sort of interfere in what the sector can do and wants to do. So yeah, I say leave it be. 

AD:
Hear, hear. Thanks. Yes, absolutely with you. I mean there's been a lot of noise around rental caps and it just doesn't make sense. You can't drive up rates and council rates and tax rates and statutory rates and the market sets the price, let's face it, we don't set the price. So, we're in the market and the market sets the price. We can't outprice the market. It is what it is and we're all in the business of industry and therefore, we need to be commercial. And I'm very supportive of that Sameer, I think it's a great contribution. 

KH:
And at the end of the day, if we're going to get this supply through it's not going to happen if there are too many impediments there. 

AC:
I think we've got enough headwinds with construction cost escalation and interest rate rises. 

KH:
Absolutely. 

SC:
My one sort of throw out there comment would be, right now there's a lot of development around the universities and in CBDs. I think, with some of these new transport links that are being opened in markets like Sydney and Brisbane, there's a good chance to try and move out of the CBDs. Maybe some of the students want to live and work not just in the CBD sort of precincts. So, I think over time, student accommodation can afford to spread out. Right now, it is. I get people want a short commute, but I think over time there's scope to sort of move out. 

AC:
I think Sameer, what we see in other markets is that university students inherently want to just be able to roll out of bed and roll into a lecture. I think we had a limit of one and a half kilometres from a university when we first started looking because the university students just won’t, they want convenience as well as all the other things. But yes, you would hope. 

AD:
Yes, a hundred percent Alex, I was about to say I love the thinking, and of course we'd love that because obviously the land cost is going to come down, it's going to give us a better return. But the reality is students are lazy. 

AC:
I wasn't going to say that. 

AD:
I've got university kids, but you know, yes, mine work and go to university, but they want the convenience. So unfortunately, the demand profile, you know, when they map even, we've got assets even, you know, a 15-minute commute from UNSW in Sydney and it's too far on the light rail. 

SC:
Do you guys think that outside of the main capital cities student accommodation still has a lot of opportunities? Say in, you know, Newcastle, Wollongong, so on. 

AC:
It depends, probably from our perspective, we always look at, you know, managing the risks. You've got to look at the depth of the market and for the international students, it's very much driven by the rankings of the universities. So unfortunately, a lot of those aren't coming in those top rankings and therefore that sort of longer-term depths of student enrollments, particularly from internationals, is harder to take a view on. And then obviously from capital markets perspective, those smaller markets are always much shallower when it comes to potential buyer pools when you go to look to exit. But that said, what we would look at for instance, if there was something to offset that risk, for instance with a university lease or something like that, which gave a level of comfort and some surety of income and that would appeal to the next buyer, you know, in five- or 10-years' time. 

AD:
Yeah, I think just to reiterate that point, that's exactly how we view it as well in terms of depth of market and then it really only in those regional areas, it only really makes sense for on campus and connected to the university where you've got sort of a hard nomination between the operator and the university to ensure that the building's full, otherwise there is too much risk because the demand profile just isn't there as a standalone. 

KH:
I think we could actually probably talk for most of the day about this. I think we've just scratched the surface, but there's obviously a lot to consider as this sector continues to evolve here. I really appreciate you taking the time out Anouk, Alex and Sameer. As the PBSA sector continues to evolve, it is going to provide that much needed accommodation for domestic and international students as well as some really significant property investment and development opportunities. So, I'm really looking forward to seeing what happens over the next few years. Thanks for tuning into this latest episode of Talking Property with CBRE. If you like the show and want to check out more, follow Talking Property on Spotify, Apple Podcasts, or your favorite podcast hosting platform. You can find a link to our latest student accommodation report in our show notes. And if you have questions in relation to this episode or ideas for future podcasts, please email us at talking [email protected]. Until next time.