Can the Build-to-rent and Large corporate landlords sector supply housing for students?
One growing housing market segment is the dedicated student apartment sector
Last updated 6 August 2019
A University of NSW Human Rights Clinic report 'No Place Like Home' found international students are vulnerable to exploitation in Australia’s tight housing market, including paying excessive bonds and high charges for basic utilities, and subject to overcrowding or unsafe conditions. AHURI research has looked at student housing in the context of a Build-to-rent student apartment sector, owned and operated by for-profit Large Corporate Landlords (LCLs).
In 2018 nearly 700,000 international students were studying and living in Australia (a 10% increase over the previous year), with most appearing to rent in some form of the private rental market including both sole occupied and shared housing, homestay housing and hostels. Students who can’t find other forms of affordable housing may have little choice but to live in marginal housing (although finding exact numbers is difficult) such as ‘unregistered boarding house arrangements, including small apartment dwellings, granny flats and rooms rented out by individuals and families.’ Such arrangements mean tenant students have very little security of tenure while the actual dwellings may be overcrowded and unsafe.
As a result, one growing housing market segment is the dedicated student apartment sector, owned and operated by for-profit LCLs. In 2017 AHURI research estimated there were around 90,000 purpose-built student housing beds in Australia catering to 6 per cent of enrolled students. The usual model for such international student housing is for small furnished units close to universities in capital cities with two rental options: small self-contained studios (18–23 m2) with a ensuite bathroom and kitchenette, and shared apartments (the most popular have 4–5 bedrooms) where tenants share a kitchen but may have their own ensuite. The units come with study desks and facilities such as internet and access to services. In 2019 single bed student apartments are renting (in Melbourne) for more than A$1,680 per month, and A$2,400 per month for a two bedroom apartment.
Any welcome increase in LCL investment in student housing would need to be carefully regulated so that dwellings are of decent and suitable quality, and are managed safely (with a duty of care) by professional, trained property managers for the benefit of, often relatively young, students.
There are real risks for small-scale investors in these investments as they primarily rely on high rental returns for them to be profitable rather than any capital gains growth (as is the case with most Australian rental housing). The model is aimed at sales (and re-sales) to the restricted market of investors only, rather than including owner-occupiers. In addition, the international student market is very vulnerable to changes in government policy, both in Australia and students’ home countries, and rental management costs/ body corporate fees are often tied up with one overarching management company, which prevents competition keeping such costs down. As a consequence, small-scale investors may struggle to get finance as banks are often not prepared to loan on such small size, ‘niche’ apartments.
However due to their ability to source non-bank funds and to control (through ownership of the entire building) the body corporate/ management costs, LCLs who provide student housing through these models can deliver a competitive revenue stream. As the units are smaller and at higher density than typical inner city units they can get much better returns than they would renting out typical inner city developments. Such investments are particularly attractive in an economic environment where return on investment yields on alternative assets have come down. The five largest commercial providers of student housing in Australia provided over 27,500 student beds in 2017.
Whether LCLs will build sufficient housing to accommodate the growing numbers of international students is uncertain. AHURI research identifies that, internationally, ‘LCLs do not always build a lot of new rental housing. This is particularly so in Germany, the US and Ireland, where LCLs have recently been active mostly in acquiring existing properties and managing their portfolios through renovations, modifications and sales. The LCLs have been active also in mergers and, especially in the US, in devising new financial instruments based on rental revenues.’ While such strategies can improve returns for investors they don’t necessarily mean more housing for students.
Any welcome increase in LCL investment in student housing would need to be carefully regulated so that dwellings are of decent and suitable quality, and are managed safely (with a duty of care) by professional, trained property managers for the benefit of, often relatively young, students. So long as dwellings are affordable, such an outcome would be easier to regulate than an informal rental pathway with lots of smaller private landlords offering marginal housing.