Investors Bid High for Student Housing
May 4, 2015
Bendix
Anderson
The rush
to buy student housing continues.
“A property will come up for sale,
if it’s halfway attractive, you will have a whole line of bidders,” says Jim
Arbury, vice president for student housing with the National Multifamily
Housing Council (NMHC), an industry organization. “It’s a seller’s market.”
Investors are pouring money into the
student housing business as new buyers enter the market. In 2014, these new
buyers filled in for the largest real estate investment trusts (REITs), which
were temporarily not buying properties after some bad earnings news hurt their
stock prices. Now in 2015, the REITs have returned, driving property prices for
student housing even higher. Prices for student housing are starting to look
high even compared to prices for apartment properties overall, relative to the
income from these assets.
“REITs are actively looking to
acquire that core, pedestrian-to-campus product,” says Ryan Lang, head of the
student housing division at ARA Newmark, an investment advisory firm that
focuses on multi-housing properties. That’s a big change from 2014, when the
top student housing REITs, EdR and American Campus Communities, bought just a
handful of properties, accounting for just 3 percent of transactions.
A long list of new investors have
also joined the bidding for student housing assets, including high-net worth
individuals, private equity fund managers and institutional investors. “There
have been a flood of new entrants into the space,” says Lang.
Cap rates in the sector averaged
just 6.1 percent in the first quarter, according to data firm Real Capital
Analytics (RCA). That’s down from 6.6 percent the year before. Cap rates have
been at 6.1 percent for the last three quarters, the lowest level since the
financial crisis.
Lower
risk premiums
Investors used to pay less for
student housing properties than they did for apartment buildings relative to
the income from the properties. But that risk premium is eroding. The average
cap rate of 6.1 percent recorded for student housing properties in the first
quarter is just 20 basis points higher than the 5.9 percent average cap rate
that investors paid for multifamily properties overall, according to RCA.
Other data firms show similar
results. Cap rates for student housing properties were 6.2 percent on average
in 2014, 60 basis points lower than the year before, according to ARA Newmark.
That’s only 15 to 20 basis points higher than the average cap rate for
apartment properties.
“There’s traditionally been a 50
basis point spread between cap rates for multifamily housing overall and
student housing,” says Lang. The total number of transactions grew slightly and
the average sales price per bed also grew by about $3,000, from $48,000 on
average in 2013 to $51,000 in 2014.
Student housing looks less risky to
investors as enrollment continues to grow at top-tier universities served by
student housing properties, according to Arbury. Developers are on track to
open new student housing communities at a rate of 40,000 to 50,000 new beds a
year over the next two years—about in line with the demand for new student
housing.
“You are not going to get overbuilt
with that,” says Arbury.