Investors size up Gulf student housing after US success

September 16, 2024, 4:15 AM

Students in shared accommodation. According to one expert, international investors have put more money into student housing than any other US real estate asset

Most popular US real estate asset
Growing GCC student population
‘Students always need accommodation’

Gulf entities have invested billions of dollars in student housing in the United States over the past few years, and are now considering making the same play locally.

Accommodation for university students has become a hot asset class amid demographic growth fueled by the millennial generation, which recently passed the baby boomers to become the largest cohort in the US.

“What product can be very resilient?” says Vincent Miccolis, managing director for the Middle East, Africa, Turkey and India at the Singaporean-owned lodging company Ascott.

“Who always needs accommodation? Students always need accommodation.”

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In early 2022 Ascott took a 20 percent stake in a fund it established with a long-time partner, Saudi Arabia’s Riyad Capital, to pour $150 million into developing US student housing.

In July, the Bahraini alternative asset manager Investcorp said it had acquired a property at the University of Florida and another at the University of Texas totalling 914 beds and valued at combined a $160 million. They were added to a $25 billion student housing empire, consisting of 1,300 properties with 16,500 beds, that Investcorp has built in the US since 1996.

International investors have long been drawn to US student housing for both financial considerations and personal comfort, says Jaclyn Fitts, co-lead of CBRE National Student Housing in the US.

In fact, Fitts says, international investors have historically put more money into student housing than any other US real estate asset.

“It’s driven by a couple of things: a lot of international investors, including the Middle Eastern investors we work with, are seeking higher cash yields out of the box,” Fitts says. “But also, many of them went to school in the US or have kids that have, so they understand what student housing looks like. That draws them in.”

You bet there are opportunities in Dubai. I hear of students all the time struggling to find housing
Matt Myers, assistant professor, Heriot-Watt University in Dubai

Internal CBRE data that Fitts shared shows foreign money in student housing made up 38.5 percent of total investment in the sector in 2019. That dropped significantly after the pandemic and was still only 12 percent in 2023.

The higher yield is partially offset by more expensive debt. Lenders view student housing as riskier, because it only leases out once a year, at the start of school, and “if you miss, you miss.”

In April 2024, GFH Partners, a subsidiary of Bahrain’s GFH Financial Group, but based in Dubai, said it had spent $300 million at the turn of the year to buy three new properties with 1,300 beds at 97 percent occupancy near top-tier universities.

This came only four months after GFH Partners exited from its prior Student Housing Portfolio I, which the company says had provided a 122 percent return in two years.

In a note posted in May on its website, GFH Partners argued that US student housing has not yet “fully” matured at the level of supply.

The number of US public and private university students in the academic year that is just starting is around 15 million. This does not include international students, of which there were more than one million last year, according to GFH Partners.

CBRE’s Fitts confirms development has been slow to pick back up after the pandemic. Data from College House, the primary data tracking service for the segment, showed that rents for the last academic year grew nearly 10 percent annually, Fitts says, rising another 7.1 percent as of the end of August this year.

An Abu Dhabi Investment Authority subsidiary established a $2 billion partnership with Landmark Properties in Atlanta, Georgia in the summer of 2022 to develop US student housing. That came after $1 billion tie-up between the two companies in March of that year to acquire and operate “value-add” student housing in the United States.

In March 2019 Saudi Arabia’s shari’ah-compliant Sidra Capital acquired seven student housing properties across six US states. Sidra Capital’sn vice-chairman, Hani Baothman, said the properties would deliver “attractive risk-adjusted returns”.

With smaller rooms and shared facilities, student housing is more like a budget hotel than a traditional property. The cost of building a unit is cheaper, while the rent that can be drawn from it is higher on a per-square foot basis, according to Matt Myers, an assistant professor at Heriot-Watt University in Dubai.

Payment also tends to be more reliable, as it is often financed by family or student loans and typically comes upfront for each term rather than monthly, Myers says.

As the student population grows in the GCC, investors are now looking at how to serve it here, too.

“You bet there are opportunities in Dubai,” Myers says. “I hear of students all the time struggling to find housing that’s affordable.”

In July, the Abu Dhabi Investment Office said it had awarded a contract to build 3,260 rooms and shared facilities across Khalifa University’s main campus and Sas Al Nakhl campus. It said this was the UAE’s largest ever investment in student housing.

In the long term, the biggest risk for investors is changing demographics, which over the next decades will see US student numbers drop after many years of growth.

“The decline is not falling off the cliff, it’s a decline, and we are used to growth, but if you are the best in the market, people will still go there,” Myers says.