New Asset Class of Student Housing

New Asset Class of Student Housing
May 2018 , by , in Trends

One of the real-estate segments that were untapped till now is the student’s accommodation as an alternative for college private hostels. Recognizing the demand and the existing gap, many start-ups and established developers are now foraying in this niche segment in an organized way.

Student Housing as a real estate asset class has reached an advanced stage in global growth curve. However in India student housing has just made a start now but developers have spotted this vast unmet demand as an opportunity to enter this segment particularly at a time when they have been experiencing a slowdown in the residential real estate space.

Mumbai, Kolkata, Nagpur, Kota, Pune, Bengaluru,Guwahati, Noida and Greater Noida are some of the cities that have not only emerged as real estate growth drivers but also the education hub in recent times. With more and more institutes coming in, there is a significant increase in the numbers of student. This has also created a huge demand of rental spaces in the vicinity. This demand for student residential till now was catered by unorganized players in the market such as PG accommodations, private hostels or rental housing.

Suresh Rangarajan K, Founder and CEO – CoLive, commented, “While poor quality of housing and lack of basic amenities is the biggest pain point for students, for the paying parent, the safety of their children is a major concern. We are currently in the process of implementing cutting-edge proprietary technologies such as FRAME (Facial Recognition Access Management Engine) and CSM (Command Centre Security Management), as well as an Emergency Response/SOS assistance service, to ensure the highest level of security for students. Through its state-of-the-art branded and serviced homes, CoLive addresses the needs and concerns of both students and parents.”

The Urgent Need

Currently, India has approximately 34 million students in the higher education space, which is more than double the size of the advanced and large student housing markets in the West. As per an industry study on the student housing market in India student rental housing is almost a 50 billion Dollar market. It is the biggest segment in residential rental space with lot of problems.

Parents were always ready to pay extra for the wellbeing and safety & security of their ward, but since the PG owners were commanding the market and the facilities were not available they were not left with the option.Given the lack of enough supply, unmet demand for student housing is very high in India. For instance, the ten leading states in terms of the number of students in the higher education space experience an unmet demand to the tune of 30-60%.

“The education ecosystem is rapidly growing in the country and student housing is getting recognized as a favourable asset class. Government’s initiative towards making country -the education hub of South East Asia, will further boost the segment. Currently education institutes are able to meet only about 20% of thestudent housing demand. This segment is undersupplied and offers a huge opportunity for the organised players to cater to the growing demand,” stated, Vineet Goyal, Founder, Youthville.

The quality of government and college-owned accommodation leaves a lot to be desired for quality conscious student and parents (especially for female students).  Better amenities, services, security, engagement and scalability are just some of the reasons professionally managed purpose-built student is poised for exponential growth.

The New Avenue

Given the on-going phase of market transformation, developers are seeking other alternative asset classes for better yields.  Once such is Student Housing, which has a tremendous potential for all stakeholders.For developers, it provides a window to diversify from the presently turbulent sectors of mainstream real estate. For asset management entities and funds, it is an emerging segment with the potential to offer returns, much higher than established assets of office and retail. For the government, this is the one way of promoting an enabling environment for students and for universities it is an avenue to enhance ex-domiciliary campus amenities.

ShubhranshuPani – Managing Director – Strategic Consulting, JLL Indiasaid, “Currently restricted to the boundaries of large campuses of universities or large private colleges, student housing as a concept has started to grab the attention of developers and investors alike.An asset class that’s accelerating in momentum, student housing is becoming increasingly crucial as the demand for good-quality accommodation facility would rise. India will continue to witness enormous demand arising from domestic migration of students in pursuit of better education.”

Student housing providers believe that tie-up with developers can prove to be a great synergy as they have inventories which are vacant and the student housing operators can help bring commercial value to the idle inventories. The segment also provides an attractive rental yield of around 15-18% luring developers, property owners as well as investors to join the bandwagon as the “student housing” opportunity becomes more lucrative compared to the current low interest rates.

“The investors are also taking note of the high annual turnover rates since students tend to renew the lease every year for the duration of the course. Coupled with low credit risk because parents are co-signers, student housing is expected to be a significant, permanent addition to the real estate market. Along with high growth, the student housing sector is particularly attractive to investors due to high yield and low risk. It is poised for even better secure and steady rental growth. Student enrolments never really see ebb during troubled times. The attractiveness, potential and minimal risk of investment is evident in this space,” explainedSaketJalan, Founder & CEO, Campus Student Communities Pvt Ltd.

Rohit Pateria, Co-founder & CEO, Placioexplaining about his company and offerings said,When Amity University incubated a student housing start-up to address one of the biggest problems of the students. Placio, as an organized student housing company came forward and started building capacity and take care of off-campus student housing. There are more than 15000 students of Amity University who live outside the campus because the campus hostel has the limitation of accommodating only 5000 students. Now these 15000 students would go to a PG or a rented apartment for accommodation. So, it gives clear market of around 15000 students who can be tapped and given a better place for accommodation as compared to PG or a rented apartment.Placioprovides purpose built student housing offering single room, double or triple sharing rooms. There are three categories: Placio Prime, Placio Luxury and Placio Dorm with price range from Rs. 10,000 to Rs. 25,000. Currently, Placio also works in partnership model not the sub-lease model with the property owners. We sign a service provider agreement, so it becomes an exclusive Placio property and the company is responsible for marketing & branding, system implementation, providing property management tool, managing their operation more efficiently, training of staff, providing dedicated community manager who is responsible for managing 150-200 students in the property. Placio works closely with the Universities, understands the requirement, channelize the demand and help in the value addition as well as growth of the property owners.”

The Growth& Challenges

Private home rental model continues to dominate the student-housing market. Most students either rent apartments individually or in groups or live as paying guests. These rental apartments are located in residential areas which may not be an ideal ecosystem for a student.

According to the segment players, the most important elements which should be kept in mind are that the houses should be well managed with all the facilities. They should be hyper-local, nearby to the university campus or college campus so that students can spend maximum time in the university campus, it should be based on community living so that students can remain connected with each other, safety & security has to be the top priority and as value additions discount cards, indoor games facilities books on rentals can be offered to the student tenants.

Evidently, there is a demand for organized student housing but the requisite supply is lacking primarily because of unorganized rental market and professional providers.The sector is nascent and it will take three to four years for quality supply to come up across these cities. Some of the top student housing operators have ambitious expansion targets.However, as experts opine, there is still time before existing players reach mid-scale level of operations and are able to offer meaningful investment opportunity for the investors.

Putting things in perspective, Ravi Ahuja, Senior Executive Director, Mumbai & Developer Services at Colliers International India, said, “While countries like USA, UK and Australia are forerunners in Student Housing sector, India is still a fraction of the market. In recent years, student mobility is increasing in India, as more number of students are migrating to different places within the country to pursue higher education and explore opportunities. However, there are limited facilities available on most of the campuses leading to higher demand for improved facilities for the mobile students. These challenges faced by students, provides a good opportunity for service providers and investors to enter the student housing market with better amenities and attractive business models to thrive in short to medium term.”

There are multiple constraints that the sector faces currently, and it ranges from cost of construction, cost of land in bigger cities, taxation concerns (expectation of tax rebate), participation from stakeholders such as the universities, vast unorganised market etc.

Universities must open-up to the idea of tying-up with student housing operators and embrace the higher standards of accommodation that such arrangements could offer to students. Currently, universities are reluctant to participate, possibly owing to fear of partial loss of control over student housing facilities. There are ways to structure the deal in a manner where universities can continue own the asset as well as earn a portion of the earnings.

Awareness is required to understand that the quality of education is one factor albeit not the only one. It is mainly about the experience of living with high standards in a relatively advanced society. Indian professors and teaching staff are at par with the rest of the world but it is the living conditions, locations and patterns of Indian society that parents wish to avoid for their children. Student housing is the umbrella term for solutions to these issues, i.e. location, living conditions, quality of facilities and patterns of living. It is the need of the hour in the education sector that these issues be solved in a sustainable and scalable manner.

Talking about the teething troubles that is faced by the segment and how they can be overcome, Jalan, said, “The problem is that of scale and perspective. The traditional operators aim to provide the bare basic services and their perspective is limited because they treat student housing as an after-thought instead of recognizing it as an integral part of the college experience. The scale of requirement only exacerbates an already inferior service.”

For its maturity and depth, student housing market in the UK could be considered as a benchmarkfor India to emulate. The UK has developed several models of student housing, many of them now being followed globally. These models form the basis of sharing of responsibilities between academic institutionsand private developers.

Charting the Way Forward

No industry can thrive in a vacuum of its own peers, consumers and suppliers. A larger ecosystem with government regulations and support has to facilitate its growth in a responsible, sustainable and socially beneficial manner.

This is even more crucial for a sector like education which has a key role in betterment of society in general. Student welfare in general and student housing in particular are keys to the growth of education sector and its unmet demand in terms of quantity, and quality threatens to hamper the growth potential of the sector and hence, the nation itself.

GST has been a huge bone of contention and confusion across sectors since coming into force. It was widely speculated that 18% GST would be applicable on this sector when the GST bill came into force. However, FnanceMinister himself clarified later that services provided by an educational institution to its students, faculty and staff are fully exempt from GST.

Thus, GST would not be applicable on annual subscription/fees charged as lodging/boarding charges by educational institutions from students for hostels. Confusion, though, still exists when it comes to private student housing providers especially if the billing entity to students is not the educational institution. Even if the educational institution is the billing entity for housing, there is no clarity on ancillary services/amenities which are sometimes separately charged like food, laundry, recreational facilities etc. “Tax incentives should be given to make this segment attractive to the operators and standardization of amenities and services should be laid down by the government, opined, Goyal.

On the taxation front, an assessment must be made on the role of student housing in overall education sector in India, and accordingly tax concessions must be granted to operators. At the moment, student housing venture attracts same tax rate as any other corporate entity.

Student housing as a product is severely undersupplied in the major markets, and has the potential of high and sustained occupancy rates. While, investors f are already looking at capitalizing on this opportunity for stronger returns, the developers too are foraying in this sector

“The potential for success in the student housing real estate market in India could be similar or even more than that in UK. Some of our cities such as Pune, Bengaluru and Chennai, see high annual student enrolments. A broad estimate indicates that currently cities like Pune and Bengaluru only accommodate about 18 to 20% of the inward migrating students,.” statedJalan.

Moreover, student housing has been attracting a significant share of real estate investment since mid-2017. Studies of foreign markets suggest that student housing real estate investment trusts (REIT) have been outperforming all other REIT indices by a considerable margin. The rental yield, i.e. the rental income as a percentage of the property’s value, is five times that of a three-bedroom flat in a premium locality in the metros.

With Indian cities gaining momentum as world class educational and research hubs, Student Housing as an asset class will slowly pick up in India over a decade. However, the developers, investors and government should make collaborative efforts to make it a successful organized business across the cities.

As per the HRD Ministry of the Government of India, there are about 35 million students currently studying in colleges/universities across the country, while about 11 million students are estimated to have migrated from another state to pursue higher education. Additionally, a recent report states that the supply in the student housing market currently stands at 6 million beds, suggesting a massive shortage of 5 million beds.

 

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