Private student accomodation has been much in demand over the last few years - by investors, and not least by the students themselves. Tight housing markets generally were partly responsible for driving students out of the classical housing markets, while the availability of more traditional student accomodation was also poor. Hence the rise of student accomodation as a new asset class, which has also met with growing investor demand for alternative investment products.
All sorts of fancy descriptive forms have sprung up to avoid using the term “private student apartment house”. So we hear of “freely financed student accomodation”, or “student housing complex”, or even “students residential building” - in fact, what they have in common is that they’re NOT run by student associations, public housing authorities or any form of church-run or charity foundation. After all, properties managed by private operators have a wealthy clientele as their target market.
1. The market for student housing
The market for student accomodation includes a broad variety of different forms, with private accomodation making up only a small share of the total market. The overall market is made up in essence of three broad segments - the small apartment market, shared accomodation, and student residential buildings. According to the 21st Social Survey of the Deutsches Studentenwerk in 2016, about two fifths of all students inhabit their own apartment, either alone (17%) or with a partner (21%). About a third (30%) live in a shared apartment with others. And of the other students who live in rented accomodatiom, about 70% live in student-run housing, and the rest in properties managed by other third party organisations.
Student living in private accomodation has been enjoying a boom since 2010, with the Deutsche Studentenwerk estimating that the stock of privately operated residential units rose from about 12,000 to 40,000 in number between 2010 and 2016. Property adviser Savills put new building activity in 2017 and 2018 at its highest ever, resulting in about 51,500 available beds by mid-2019. A further 22,000 private beds are expected to come on stream by 2022, with 9,000 planned for 2020 alone.
Rents for this accomodation vary widely from one provider to another. The 2016 Student Survey showed that in 2016 students spent an average of €323 per month for rent including utilities, or at about 35%, the lion’s share of their monthly budget. The mean expenditure on rent was between €251 and €300, with fewer than 1% paying less than €150. In student-run accomodation the gross rent averaged €245. Only about 8% of all students were spending more than €450 for their rent and utilities, the survey results showed.
The rents for privately-run housing were generally about €500. About a quarter of housing in this category cost more than €600, while less than one in five cost less than €350. Hence only a fraction of all students are the target market for private accomodation, with a monthly budget of €1,500 being the effective threshold for qualifying for the market for private student accomodation.
2. Perspectives for private student accomodation
2.1 Demand - demographic developments and student tendencies
In determining the demand, the universe can be taken as the overall number of students, which has grown by 40% over the last 10 years. In 2011 the number of commencing students at the Universities and the Universities of Applied Sciences reached a new peak of 518,700 and has remained fairly stable at about that level since. The forecasts from the Cultural Ministers Conference do not envisage any great deviations from these numbers in the coming years, but rather a certain constancy around this figure, based on assumptions about the number of school leavers and the number of commencing students.
Based on the figure of about 510,400 commencing students in 2018, then the number of commencing students will be in a range from a minimum of 491,000 in 2025 (because of extended secondary school duration) to a maximum of 514,000 in 2019. At the end of the period under consideration in 2030, a total of about 510,000 student commencements is expected and forecast. Given an annual variance over the period of less than 5%, a fairly constant number of student commencements can also be assumed. The same applies to the number of secondary school pupils, with the large annual growth of previous years having levelled out.
2.2 Availability and Competition
The increasing activity in the market over the last few years by private student accomodation providers will continue, albeit with somewhat less dynamism than before. In addition to the typical purely local or regional investor with a single property, several large nationwide companies have entered the market since 2010, along with international and institutional investors.
There are several indications that the market for private student accomodation has already peaked and is now entering a period of slower growth or even saturation. In cities where many such properties have been built in the more obvious locations, demand is no longer increasing. In fact, there is increasingly brisk competition in the bidding for the few scarce development sites, since the same sites could be used by developers to build normal (i.e. non-student) condominiums. Over the coming years we can generally expect many less project completions, as part of overall structural change. This increasing market saturation will result in:
- More projects having to be planned in the price segment above the general average rent (€325-€500), with the market for above €500 being largely saturated
- Private providers shifting their activities to cities other than the big metropolises, although here they won’t be able to charge the same high rents
- Private student accomodation providers developing housing for groups other than students, such as young professionals or weekend commuters
In addition, there is growing competition from new alternative forms of living, which is attracting new entrants into the market. Similar concepts such as micro-apartments, temporary living, serviced apartments or co-living arrangements could also be viewed as student accomodation, so that the market for student accomodation must increasingly be seen as a sub-segment of a wider niche sector of the market.
Easing-off in Residential Markets
There has been a certain relaxation in the housing markets in the larger metropolises and the university cities, as evidenced by the lower level of rent increases. With the planned number of future completions and demand not rising so strongly, the housing shortage can be expected to ease off. This will generate even more living accomodation for students, and create even more competition for the private student housing providers, making it highly questionable as to whether so many students will be prepared to pay the higher prices demanded by the private options.
3. Conclusion
After an extended boom phase over the last few years, the market for student housing, particularly private accomodation, is heading into a period of slower growth and even stagnation. Operators of private student housing are going to have to face up to the challenges that this new - much more difficult - market situation will present.
Dr. Günter Vornholz, Professor für Immobilienökonomie an der EBZ Business School in Bochum
