Investing in real estate is never an easy decision.
Would-be landowners need to look at items such as location, property type, commercial versus residential and of course financing and ongoing expenses. In the myriad investment choices, student housing may not be the first thing that comes to mind when considering a new investment.
However, demographic shifts and the maturity of the market are making it more attractive to invest in student accommodations than a generation ago.
According to the Association of Universities and Colleges of Canada (AUCC) there were 1.2 million students in degree programs on Canadian campuses in 2010: 755,000 undergraduates, 143,400 graduate students studying full-time, and an additional 275,800 students studying part-time. Ten per cent of those students were international. AUCC says the number of full-time university students has more than doubled since 1980, and part-time enrolment is up 16%.
And with that growth has come a new set of expectations both by students and their parents in terms of, not just the education they are receiving, but the off-campus environment in which they will inhabit for the next four years. Better housing, cleaner and safer environments, amenities and piece of mind (at least for the parents) are part of the new way of thinking for students when it comes to the housing they will seek out.
Profit or pit?
Most real estate investors might balk at the idea of student housing. High turnovers, the perceived immaturity of tenants and the general upkeep needed might make investors think twice about this market. However, it is essential to remember that student housing is a niche market under the multi-residential umbrella.
Dennis Mitchell, Deputy Chief Investment Officer with Sentry Investments in Toronto explains the multi-residential market is one of the most appealing real estate investments on its own merits.“Multi-residential is attractive to begin with because volatility and cash flow is lower than the volatility and cash flow in other real estate sectors. Your tenant is theoretically less sensitive to rent increases than other residential or office tenants would be. So those things are what student housing has going for it just as a subset of multi-res.”
Not only is the volatility lower but also there is an assured tenant base that can be charged on a “per-bed” basis rather than a single-family basis. Benjamin Bach, Director and Sales Representative with KW Commercial in Kitchener, Ontario notes, “if we look at why people prefer student to multi-family, typically we see a higher cash flow on student properties.”
For example, a typical four-bedroom townhouse to rent in London, Ontario, if rented to a family, might take in approximately $1,200 per month, says Derek Lobo, Chairman and CEO of Dala Inc, a consultant to the student housing industry. However if that same apartment was rented “by-the-bed,” a landlord might be able to get $1,600 for that apartment.
Lobo says the benefits far outweigh the costs associated with student tenants. “I can get $1.60 per square foot versus $1.20 per square foot. However, it’s not going to cost me $400 more to run that property.”
Landlords and real estate investors agree. Kevin Charbonneau is Vice-President of The Opes Group in Waterloo, Ontario. His firm owns and operates a number of student housing projects in the area. “Student housing is a “per-bed” basis. You do get more money per month in terms of gross rent and you don’t necessarily have a lot more expense then if you rented the house to a traditional family.”
Besides the dollars and cents, other aspects make student housing, as an investment, attractive to prospective investors. Student populations and enrolments are growing (see ‘Enrolment By Province’ on p.50).
Skyline Apartment REIT owns several properties in Ontario, one of which, in London, is mostly inhabited by students (see ‘Case Study – The Senate’ on p.52). BJ Santavy is a Vice-President with Skyline and explains the change in thinking. “There’s a demand for decent student housing. They’re bringing their parents with them and the parents are becoming more selective,” she stresses. Santavy adds that a lot of the growth in the market has to do with competition. Competition is growing and to get the most rent, housing has to be the best.
Managing the unmanageable?
Once investors see that money can be made in the student housing market, questions still loom. Is it worth dealing with students? Can they afford the rent? Isn’t turnover high? Will they take good care of the property?
Any of these questions potentially scare investors away. However, Lobo says investors need to adjust their thinking. “Most people think of students as a renter of last resort. You have to turn this upside down and think of the student as a valued customer. You have to put in amenities and services that students want and students will pay good money for good apartments,” he adds.
Lobo says there will be more wear and tear on the accommodations, however the higher “per-bed” rent will more than offset the costs.
Charbonneau says investors have to do their homework when hiring a property management company. “The property management company we deal with has a large database of potential tenants. In terms of tenant turnover, you need someone who is in the field a lot and can show the property a few months in advance of the current tenants moving out.”
In fact, adds Mitchell of Sentry Investments, landlords should expect a heavy leasing season each year as opposed to traditional apartments, which see turnover between 30% and 50%. With that comes a higher managerial context to student housing. However, it provides an opportunity for someone who is a sound operator to generate better returns.
Adds Santavy, “most of those pitfalls can be avoided by making sure you are properly screening people. A lot of small-time landlords go on gut instinct. They meet potential tenants, they think they are nice, they seem responsible, they present well and they think they don’t need to check references because they got a good feeling about them.”
Santavy, Lobo and Bach agree that it is more common for parental guarantees or co-signing of leases to occur before any deals are made. It gives piece of mind to the landlord that a stable source of income is backing the tenant.
Bach says that getting the best tenants is often determined by the property itself. “The best properties attract the best tenants. If you have a newer, nicer property, then your rents are probably going to be higher and you’re going to attract someone that wants a nicer property.”
To read the rest of this article and learn more about student housing -- which markets to enter and how to pick and manage properties -- pick up a copy of our January issue, now on newsstands.
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