Student housing+

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Student housing+

Assessing opportunities for investing in European student housing, by Benjamin Rüther, Senior Research Manager and Roelfke Buitink, Research Manager at Bouwfonds Investment Management

Universities across Europe are expected to attract more international students in years to come on the back of the ‘Bologna’ standardisation process, fast growth in the number of Bachelor’s and Master’s programmes in English and often significantly lower costs compared to the US or UK, all of which is making comparing degrees easier.

The subsequent increase in demand for student housing should create fresh opportunities to invest in this real estate niche. However, little or no research is available to guide investors in this market, except for London, where student housing has developed into a mature asset class. In general, investors are well-known for following international student rankings. But what if these rankings are leading them astray? For instance, it does not always pay for everyone to pursue higher education, especially for students who have to take on large amounts of debt, as research has revealed.

A new approach to a top-down assessment of potentially attractive locations for investments in student housing is trying to fill the research void.

The two key ingredients in this approach are (1) a ranking of higher education geared towards real estate investors, and (2) the ‘affordability’ factor for students. A comparison of selected locations in four European markets – France, Germany, the Netherlands and the United Kingdom – based on this approach shows potential opportunities well beyond the ‘Ivy League’ of academia.

For example, because of their age and focus on established scientific subjects, older universities often score better on the number of English-speaking publications and citations than the younger (but perhaps thriving) universities focusing on applied sciences. Maastricht University in the Netherlands, for example, is ranked 6th in the QS Global Top 50 of universities founded less than 50 years ago, and is the highest-ranked European university in this list, but barely makes it into the overall Global Top 100.

Figure 1. Attractiveness for investments in student housing

A nuanced look at international university rankings

With little or nothing to go on in terms of existing market research, real estate investors wishing to explore opportunities in student housing might be inclined to look for clues in proxy indicators of attractiveness, such as international university rankings like the QS World University Ranking or The Times Higher Education Ranking.

While these rankings will point out large concentrations of students, spending power and limited or non-existent vacancy risks, they also point investors towards some of the most expensive real estate on the planet – notably Oxford and Cambridge in the United Kingdom, and US leaders such as Harvard, Stanford and MIT – all respected brands automatically associated with top-notch education and guaranteed career success.

These and other leading Anglo-Saxon universities tend to top the international league tables because the underlying criteria for these rankings will favour the established, English-speaking pedigrees: the number of academic publications in English, the university’s size and age, and the research conducted at the university.

Source: Bouwfonds IM Research, 2014

There are also relatively few French and German universities in the leading international rankings, although these two countries combined attract more than 10% of the world’s foreign students. The reasons are not hard to find – and they underline how important it is for investors to look beyond the ‘Ivy League’ of the prominent Anglo-Saxon university brands: ● German and French universities are less researchdriven than Anglo-Saxon universities. In both countries, research tends to be concentrated in separate, privately or publicly-funded research centres,

which operate independently from universities.

While some of these institutes may be spin-offs from universities, or collaborate closely with them, their work is not taken into account in assessments of universities’ research efforts and results. ● In France, the investor perspective should be broadened from the state-funded universities with low-to-zero tuition fees to include the ‘Grandes Écoles’, either state-operated or privately-funded institutions focused on specific areas of professional expertise, such as finance, business or engineering.

Although the entry requirements for these Grandes Écoles are very demanding, they tend not to feature among the top in international rankings because they are relatively small. ● While some long-established universities in Germany have been rising in the international rankings (owing to institutional strategies to promote toplevel university research), the country also boasts several newer universities which have become centres of excellence, often in technology. While they do not feature prominently, if at all, in the leading international rankings, universities such as RWTH Aachen and Karlsruhe Institute of Technology are increasingly sought-after destinations for students from inside Germany, as well as from abroad, particularly from Asia.

Many of the universities that ‘fail’ to make it into a global Top 20, 50 or even 100 list do not necessarily provide ‘substandard quality’ or draw less attractive student populations from a real estate investor’s perspective. Like students, investors should therefore adopt a broader perspective in their initial assessment of potentially attractive university locations.

An analysis of the most attractive cities to invest in should not be based solely on international rankings. It should also take into account the internationally well-known universities and business schools, ‘national stars’, and relatively big student cities1, as shown in figure 1 (derived from the earlier Bouwfonds IM report “Investing in European Student Housing” from April 2013 and based in part on the Bouwfonds Regional Rating scores for overall residential attractiveness).

As expected, the map shows that – for the four European markets focused on here (i.e. Germany, France, the Netherlands and the UK) – most of the global stars2 are located in the United Kingdom and the Netherlands, while national stars are mainly found in France and Germany due to their comparatively lower number of programmes taught in English and different structures in higher education (and academic research) vis-à-vis Anglo-Saxon universities. That said, both Germany and France offer a wide variety of potentially attractive locations across the country in view of the quality of

education combined with student numbers. Even locations without national stars should not be overlooked – one example being Montpellier in France, a city with no Grande École in the French top 10, but with a very attractive residential investment area where students (some 67,000) account for about a quarter of the population.

But the quality of education is only one key factor accounting for student numbers. In coming years, the affordability of a university education is likely to become an increasingly important consideration for students, and lower-cost universities can be expected to become relatively more attractive to international students as a result.

BIM Ranking

Figure 2. Affordable education matrix Toulouse

Paris

[Grande École]

Maastricht

London

Amsterdam

Sunderland

Berlin

Edinburgh

Manchester

Dresden

Groningen

Montpellier

Strasbourg

Liverpool

Leeds

Munich

Lyon

Aberdeen

Source: Bouwfonds IM Research, 2014

Frankfurt

Enschede

Total academic costs

Affordability: an increasingly important selection criterion for students

The ‘Bologna’ standardisation process for higher education qualifications is making university degrees more comparable internationally, narrowing the perceived quality gap for universities on the continent vis-à-vis universities in Britain and the US. Also, many universities outside the UK and US are increasing the number of degree programmes they offer in English, thus removing an important language barrier for many potential foreign students.

As both these developments significantly broaden the range of universities that students can choose from, a third selection criterion – the affordability of a university education – is likely to become more important for students over coming years. Universities on the continent could attract a growing share of the international student population as a result, because their degrees tend to have significantly lower total academic costs on account of lower tuition fees and housing costs.

Tuition fees While it may be true that one cannot place an objective value on education, the price tag of a higher education diploma matters a great deal to most people – in view of its sheer affordability and to what extent the job market will provide an adequate ‘return on investment’.

For all but the most privileged, studying in the US or the UK not only yields respected degrees but also piles of debt. On average, the cost of studying at a US university has risen at least four times faster than inflation since the early 1980s, according to a report by PayScale. Acquiring a degree at the most reputable US and UK universities may cost several tens of thousands of dollars per academic year.

While the gilt-edged MBAs or engineering degrees may still pay off handsomely, most students have discovered the hard way that high-priced education does not guarantee a successful career and prosperity. Consequently, taking on piles of debt to get a respected degree may be as foolhardy as, for example, borrowing too much money for a house in an overheated market. Sharp increases in tuition fees might thus be compared to a real estate ‘bubble’.

This is notably illustrated by the sudden 25% drop in EU students enrolling in undergraduate programmes at English universities in 2013 after annual tuition fees for these universities were raised from £3,000 to £9,000.

Under EU rules, students from other EU member states must pay the same fees as UK students.

But as they may not have access to similar terms and conditions for student loans, many of those who had been thinking of studying in England may well have reconsidered the attractions of studying on the continent, where tuition fees are often significantly lower owing to state subsidies for higher education.

For example: ● In the Netherlands, EU students pay annual tuition fees of about €1,900 ● Public universities in France or Germany charge about €500 or less for an academic year ● In Austria, Denmark, Finland and Sweden, no tuition fees are charged at all.

Housing costs Another obvious cost concern for international students is the cost of living – notably total rental costs (including service charges and utilities). Here again, the US and UK are in a class of their own compared with much of continental Europe. Barring subsidised and university-controlled student housing, student accommodation in London (typically a small one-bed flat) is let at anything from £175 to £479 per week.

By comparison, a small studio in the most expensive residential market in Germany – Munich, which boasts two universities in the global Top 100 – would cost about €150-220 or £125-180 per week.

Or take Berlin, also home to two global Top 100 universities, which in spite of its relatively small volume of institutional halls appears to be very affordable compared with many other European university cities. Here, a furnished privately let onebed flat costs about €135-200 (£110-165) per week.

Similarly, in the Netherlands, accommodation in Amsterdam or Utrecht would be available at €150175 (£120-145 per week). Both cities host a global Top 100 university.

it cost to study in a particular town or city, and what is the quality of education you get there?

This equation is mapped out in figure 2, which features some big university cities for four European markets: France, Germany, the Netherlands, and the United Kingdom.

It demonstrates, for example, that high-quality education can be had in many parts of the UK, but that this education comes at a hefty price. The same is true for the French Grandes Écoles. But it also shows that many major university cities on the continent provide good education with far lower total academic costs. This is a relative advantage which is likely to boost student numbers at continental universities.

The matrix clearly suggests that real estate investors looking at opportunities to invest in student housing should not focus only on the leading university cities in the UK. These are typically based in expensive cities such as London. Instead, they should also focus on the right-hand side of the matrix, especially the star quadrant. The cities in that quadrant offer education at a high level against low academic costs.

Of course, this is just a ‘rough’ top-down analysis and every single student housing investment needs to broaden the view and to include a very detailed bottom-up analysis.

Footnotes: 1 Cities with more than 35,000 students or the proportion of students in the total city population is above 25% with a minimum of 7,500 students 2 Regions with an average ranking in our Regional European University Ranking higher than 50

Benjamin Rüther, Senior Research Manager

Roelfke Buitink, Research Manager

For more information, please visit: www.bouwfondsim.com

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If the cost of studying in a particular town or city (as expressed by the sum of tuition fees and rental costs) is factored in, we can map the cost versus the quality of education by location. In other words: what does

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