Globally, student housing is an emerging asset, and hence many PE funds are scouting for student housing investment opportunities. Investing in student housing also serves well as a portfolio diversification strategy. Post outbreak of COVID-19, operational residential assets have been resilient and in developed nations residential REITs and student housing REITs have continued performing well.
Student Accommodation investment opportunities also bring the potential of higher yield rate compared to office assets on account of dependency on education institutes and lower flexibility for other uses. However, investors are attracted to this asset class due to stable cash flows.
In this article we will cover the different aspects which are important from an investor’s perspective for investing in student housing and how PE funds value student housing assets for which occupancy is guaranteed by an education institute.
A. Important factors for PE funds Investing in Student Housing
PE funds assess following attributes in student housing investments:
1. Track record & Reputation of the education institute
Reputation and track record of education institution is of prime importance in evaluating Student Housing investment opportunities. Investors look at number of years of operation, college ranking (NIRF, QIS and other reputed rankings), different accreditations (AICTE, others), placement performance, student strength, hostel strength, hostel fees and other parameters. Investors also evaluate institutions based on enrolment growth rates and future growth plans of the institutes.
2. Location of the institute & hostel
Location of the institution does not matter for investors, but it has a role in valuation. Tier 1 locations commands better yield rate as the investor has confidence for the future value & flexibility of use of the asset compared to Tier 2 and 3 locations. Also, investors expect longer lease period for Tier 2 and 3 locations to offset the potentially higher risk owing to over dependence on the institute only. Similar logic is also applicable for some micro-markets of Tier 1 locations.
Also, investors prefer hostel to be in campus or in proximity as it negates any leakages to competition and, also as students don’t prefer commuting to college. In addition, investors feel that they have better control on the guaranteed rentals aspect from the institute.
3. Student strength, course type, fee for courses and hostel
Total student strength and more importantly the migrant student strength plays important role in student housing requirement. A higher migrant population ratio which is predicted to grow is perceived as a good investment.
While assessing Student accommodation investment opportunities, Investors also looks at type of courses run in the institute and their academic fees. Many courses have good future growth plans and investors prefer to invest with education institutes which have courses in demand and have successfully maintained good course fee.
The economics of the hostel is dependent on students need and their paying capacity. Generally, a good college with a healthy course fee tends to have premium hostels and students who are willing and capable of paying for such a facility.
4. Student housing status
Investors scout for both greenfield and brownfield Student Housing investment opportunities, though they prefer brownfield to start their relationship with the institute and fund additional hostel needs if required. PE funds does not prefer to take development risk and therefore they ask institutes to take the responsibility for development and purchases the assets post completion of the project.
B. Methodology adopted for valuation of student accommodation investment opportunities
For student housing guaranteed by an education institute,
PE funds uses Yield Rate (Income Capitalization) methodology to value student housing assets.
- I. Total Annual Revenue (X) computed based on occupancy guarantee and annual hostel fee.
- II. Total Operating charges (Y) including food charges, utility charges, housekeeping, regular maintenance charges, transportation charges (if any) and operator’s fee.
- III. Annual Gross Operating Profit (Z) equals to total annual revenue (X) minus total annual operating charges (Y).
The asset value of the student housing varies between 10 to 8 times of the Annual Gross Operating Profit (Z) or Yield rate of 10% to 12.5% based on ownership of the property (freehold property has better yield rate compared to long term leasehold rights), reputation of institute, location of institute and other factors mentioned above in the article.
Also, gross operating profit needs to annually escalate at 5% per annum. The lock-in period for such transaction varies between 20 years and 30 years; if the property is on long lease basis the lease term is 30 years + 30 years.
Institution funds are currently not evaluating private student housing investment opportunities without commitments from the education institutes. Mostly, hostels operating under this model are owned by the landowners/institutions and operations are outsourced to student housing operators on fixed rental basis/ revenue sharing or management contract.
The sustained interest in student housing investment opportunities is a strong reason behind the brisk growth rate of the Student Housing asset class in developed countries. India is also witnessing surge in need of Class A student housing facilities. Monetization of student housing assets helps institutions to deploy available capital for expansion, upgradation of education infrastructure and operations or to retire existing debt.
Meraqi’s Solution for the PMSA sector:
We work with Education Institutions, property owners, fund houses and operators in the following services pertaining to Student living developments:
- Acquisition/ Disposition Services: Assist in raising equity/ debt funds for student living backed by institutes/ universities.
- Transaction Services: Tie-up with operators for student living asset owners/ institutes
- Advisory Services: Location Study, Demand/ Supply Gap Analysis, Pricing Strategy and others
- Valuation & DD Services: Property Valuation, DD Services: Regulatory, Cost, Price, Revenue audit, building audit, compliance audit and others