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growing demand

Europe

future

education

foreign

housing

domestic students

investment

anti-cyclical

analyses

growing demand

Investing in European Student Housing

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The challenge for institutional investors of finding attractive investment opportunities has increased significantly in recent years as the successive financial, sovereign debt and economic crises have resulted in increased share price fluctuations, record low interest rates and rising vacancy rates in commercial real estate, the latter investment class suffering additionally from the growing trends of working and shopping from home.

In this climate, growing interest can be observed in the United Kingdom, but also in continental Europe, in a so far largely neglected niche of the real estate market: student housing.

Looking back on its own positive experiences to date with investments in this segment, Bouwfonds REIM decided to provide its clients with an overview of this possibly unfamiliar asset class – where selected investment based on solid research of opportunities and risks can provide a valuable addition to the real estate component in investment portfolios.

The report, entitled Investing in European Student Housing, focuses on the three core markets of Bouw-fonds REIM’s European Residential Fund (France, Germany and the Netherlands) as well as the United Kingdom, the only country in Europe with a liquid student housing investment market.

Key findings

The report concludes that student housing has attractive general investment characteristics compared with other segments of the real estate market available to investors:

• Attractive yields – On average, yields from student housing appear to exceed yields from regular residential housing, even when taking into account the relatively management-intensive nature of student housing. These higher yields are not a temporary phenomenon and cannot be fully accounted for by the lower quality of the cash flow or the higher average risk profile, either in the United Kingdom or in the conti-nental European countries – making the sector in general interesting to invest in.

• Sizable market – With the total number of students requiring accommodation in the countries reviewed approaching 7 million, the size of the ‘existing’ professional investment market is cautiously estimated at around € 20

billion, with considerable scope for expansion over time, given that professional investors account for only 8% of the total market in the United Kingdom and far less (perhaps as little as 2%) in the other three markets reviewed. • Stable demand outlook, unlike many other real

estate niches – An easing of domestic student

Investing in

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numbers in many European countries, due to demographic factors and rising tuition fees, will largely be balanced by a growing infl ux of students from outside Europe who are attracted to its high average academic standards, relatively affordable programmes, many Master’s degree programmes taught in English, and attractive historical and cul-tural environment. If we combine our outlook for domestic and foreign students, we estimate that the total number of students in Germany, France, the Netherlands and the United Kingdom will increase by 3.3% between 2011 and 2025.

• Anti-cyclical nature – While yields from stocks, bonds and commercial real estate typically suffer during an economic downturn, enrolment in higher education tends to be resilient or even increases when the economy is weak because of poor prospects in the job market.

• Favourable risk profi le – Leases are relatively short but default rates are low, as students tend to be reliable tenants owing to the often diverse nature of their income, backing by parents and their ability to economise on non-essentials in order to pay the rent.

0 1,000,000 2,000,000 3,000,000 4,000,000 5,000,000 6,000,000 7,000,000 8,000,000 9,000,000 2000 2005 2010 2015 2020 2025 Germany France United Kingdom the Netherlands Total

Figure 1: Outlook in terms of total number of students Source: Bouwfonds REIM Research, 2012

Student housing is one of the few segments of the

real estate market expected to see stable demand.

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• Sufficient liquidity – Also resulting from alternative exit strategies, given that most student buildings are located in strong residential markets and/or capital cities, and are already tailored for alternative use, taking into account the growing trend toward single-person households.

Student housing – stable demand outlook

The report examines the effects of various funda-mental factors on the demand side of the market for student housing, such as overall demographic trends, the interplay between higher education and the job market, and the effects of governments’ education and educational funding policies. It also looks at the effects of multilateral developments such as the ‘Bologna process’, which aims to make diplomas mutually recognised across most of Europe and, importantly, to raise the proportion of EU students learning in other EU countries from 2% to 20% by 2020. Overall, the market for student housing in the four countries reviewed is buttressed by a generally shared conviction that knowledge is the key to individual and collective prosperity, particularly in Europe, where economic growth increasingly depends on productivity growth and, hence, shifting economic activity to occupations with higher added value – a shift which crucially depends on higher education.

Moreover, higher education increasingly means international higher education, which is viewed by prospective employers as a token of self-reliance, entrepreneurship and aptitude to work in a global economy. This trend is reflected in the dramatic increase in the number of Master’s Programmes taught in English in non-English-speaking countries across Europe, notably in Northern and Western European countries such as the Netherlands, Germany and Sweden. This development suggests continental Europe is in the process of building a globally competi-tive Europe-wide education market, which is likely to have a beneficial effect on the international demand for higher education in the four markets reviewed. In the four European countries under review, domestic enrolment will decrease slightly (except in France) up to 2025, but all of these countries can expect conti-nued growth in the influx of foreign students during this period – also, increasingly, from outside Europe. Specifically, if we combine our outlook for domestic and foreign students, we estimate that the total number of students in Germany, France, the Nether-lands and the United Kingdom will increase by 3.3% between 2011 and 2025, or 0.2% annually. This makes student housing one of the very few real estate niches that will benefit from stable demand in the coming decades.

Figure 2: Relation between education and prosperity Sources: Oxford Economics and Unesco, 2012

India Ghana Mexico Argentina Poland Spain United Kingdom New Zealand France the Netherlands Japan United States Sweden Australia Switzerland Norway R = 0.73279 10 12 14 16 18 20 22 0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000

SCHOOL LIFE EXPECT

ANCY (YEARS)

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Student housing – shortages expected to persist

The supply side of the market for student housing is a local issue, as there are major differences between the various university cities in terms of attractiveness, future building programmes and the availability of alternative lodging for students. The operating models and ownership structures also differ and may not always be structured in an effi cient way. A few general trends can, however, be identifi ed: many European university cities have huge shortages of high-quality and affordable purpose-built student housing; many top university cities have long waiting lists for suitable housing; considerable numbers of domestic students continue to live with their parents but would rather live on their own; the gap between demand and supply is particularly wide in the larger cities that are home to top universities – making for a negligible risk of vacancies in student housing. While new student housing supply is expected to enter the market in the coming years, mainly developed by private and professional investment companies, the

shortage is likely to persist, at least for the next few years. This is also because fi nancial and other con-siderations will increasingly induce universities and social housing companies to pull out of this market, while most developers still struggle with debt and cost management, which limits their production.

Student housing is expected to attract growing interest from professional investors and operators

The report notes that the investment market for student housing is not yet transparently structured – student housing being widely spread among many different non-profi t, private and professional providers. By and large, the student housing mar-ket is dominated by the private sector with a total share of approximately 85%. Of the four countries reviewed, only the United Kingdom can be said to have a professional investment market for student housing: about 8% of all student accommodation in the United Kingdom is in the hands of institutional investors and operators.

0 500,000 1,000,000 1,500,000 2,000,000 2,500,000 3,000,000 3,500,000 4,000,000 4,500,000 2000 2005 2008 2009 2010 Africa Asia Europe North America

Latin America & The Caribbean Oceania

Other

Figure 3: Number of foreign students broken down by world region destinations Source: OECD, 2012

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Combining the ownership structure with the various types of accommodation and operating models results in the most common recognisable clusters or product-market combinations in student housing: on-campus basic rooms offered by public companies (mainly United Kingdom), luxury furnished studios operated as a student hotel, and privately owned in-house student rooms or shared apartments (see fi gure 4: Product Overview). As a result, the returns (and required yields) span a wide range – or at least they should, to properly refl ect the risk return profi le depending not only on location but also product segment, although this is not always the case. New specialised student housing operators are expected to enter the European market, and existing student housing operators from the United Kingdom will probably also expand overseas. We believe that in time, this will support professionalism in the stu-dent housing investment market.

The ‘hotel’ operating model, examples of which have only recently started to appear in continental Europe, is likely to become more common in future owing to the increasing interest in student housing shown by institutional investors.

Prime investment targets are capital cities and selected ‘secondary’ university towns

The report concludes with a top-down analysis of the ‘investable universe’ of European student housing. While the stock of accommodation available to students varies from city to city, there is a noticeable

overall shortage, both quantitative and qualitative, in the four countries researched (France, Germany, the Netherlands and the United Kingdom).

Based on analyses covering the next fi ve years (2012-2017) for three key attractiveness criteria – regional residential attractiveness, regional European university rating, and student market liquidity (size) – a map was created showing the ‘investable universe’, the attractive regions for investing in student housing. The ranking provided by this map may contrast with rankings offered in other studies, because the meth-odology applied in this study values a strong local residential market to increase alternative exit strate-gies for investors. It shows that United Kingdom and Dutch regions are generally attractive due to the presence of both top universities and a absolute large student population, while French and German regions are mainly attractive because of their relatively large student populations. The university rankings of the latter two countries are lower because they currently offer fewer programmes taught in English.

All capital cities offer good investment opportunities in student housing, mainly because they have a large student population and an attractive residential investment market. Satellite cities of the capitals of the United Kingdom (Cambridge, Oxford) and France (Evry) are also attractive. Some cities, such as

Manchester and Munich, not only host a top university but also have a large student population and therefore offering also interesting investment opportunities.

Figure 4: Product Overview Source: Bouwfonds REIM , 2012

PRIVATE INVESTORS, LANDLORDS In house-rooms, shared appartments PROFESSIONAL INVESTORS

Studio’s, Student hotels

UNIVERSITIES / SOCIAL HOUSING

Student rooms, on-campus

HIGH RENT

LOW RENT

PROPERTY SERVICES

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Figure 5: Attractiveness for investments in student housing Source: Bouwfonds REIM Research, 2012

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Colophon

Drawn up by Bouwfonds REIM Research, April 2013 Dimf Ghijsels-Kerkhoff, Head of Research Roelfke Buitink-van de Pol, Research Analyst Jeroen Beimer, Senior Research Analyst Benjamin Rüther, Research Analyst Published by Bouwfonds REIM

De Beek 18 P.O. Box 15

3780 DA HOEVELAKEN

Disclaimer Bouwfonds Real Estate Investment Management B.V.

This publication has been prepared by: Bouwfonds Real Estate Investment Management B.V. or an group company thereof (hereinafter “Bouwfonds”). Bouwfonds Real Estate Investment Management B.V., has its registered office: De Beek 18, NL-3871 MS Hoevelaken, P.O. Box 15, NL-3870 DA Hoevelaken, the Netherlands. Bouwfonds is part of the Rabo Real Estate Group.

This publication is for distribution only under such circumstances as may be permitted by applicable law. This publication is only for the information of customers of Bouwfonds or its group companies and is provided to such customers subject to the terms of business in place between the recipient and such group company or Bouwfonds. This publication was based on current facts and conditions that can change from time to time. The information contained herein is based on selected sources considered reliable. No republication or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. No republication is made by us as to the reasonableness of the assumptions made, or the accuracy or completeness of any models contained herein. Any opinions expressed in this publication are subject to change without notice and reflect the current judgment of the author and may therefore differ or be con-trary to opinions expressed by other business divisions or group companies of Bouwfonds. Bouwfonds is under no obligation to update or keep current the information contained herein. This publication has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient. It is published solely for informational purposes and is not intended to, and should not be relied upon as comprising a complete report or analysis. Bouwfonds, its group companies, employees, related accounts, discretionary accounts, or clients may have or have had interests or long or short positions (including loans) in the securities or other financial instru-ments referred to herein (if applicable), and may at any time make purchases and/or sales in them as principal or agent. This publication does not constitute or form part of any offer or invitation to sell or the solicitation of any offer to buy any financial instrument, provide any underwriting commitment, or make any offer of financing on the part of us, nor is it intended to give rise to any legal relationship with you or any other person, nor is it a recommendation to buy any financial instrument or enter into any transaction or financing. Neither Bouwfonds nor any of its group companies, nor any of Bouwfonds’ or any of its group companies’ directors, employees or agents, accepts any liability for any loss or damage arising out of the use of all or any part of this publication. This publication should not be regarded by recipients as a substitute for the exercise of their own judgment. No part of it may be (i) copied, photocopied or duplicated in any form by any means, or (ii) redistrib-uted without the prior written consent of Bouwfonds. This disclaimer shall be governed by and construed in accordance with the laws of the Netherlands. All disputes arising out of or in connection with this disclaimer shall be submitted to the exclusive jurisdiction of the courts of the Netherlands.

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Netherlands

De Beek 18 3871 MS Hoevelaken T +31 33 750 47 50 E reim@bouwfonds.nl www.bouwfondsreim.nl

large student share

asian students

students

best university

knowledge

global prosperity

domestic

student mobility

the bologna process

student housing shortage

student housing market

attractive

top destination

university ranking

Schiphol Boulevard 349 1118 BJ Amsterdam Schiphol T +31 20 206 66 03 E reim@bouwfonds.nl www.bouwfondsreim.nl

Germany

Potsdamer Straße 58 D 10785 Berlin T +49 30 59 00 9760 E reim@bouwfonds.de www.bouwfondsreim.de

France

6 avenue Franklin Roosevelt F 75008 Paris

T +33 175 579 020 E om@bouwfonds.fr www.bouwfondsreim.fr

Figure

Figure 1: Outlook in terms of total number of students Source: Bouwfonds REIM Research, 2012
Figure 2: Relation between education and prosperity Sources: Oxford Economics and Unesco, 2012
Figure 4: Product Overview Source: Bouwfonds REIM , 2012
Figure 5: Attractiveness for   investments in student housing Source: Bouwfonds REIM Research, 2012

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