STUDENT HOUSING: AN INVESTMENT OPPORTUNITY?

STUDENT HOUSING: AN INVESTMENT OPPORTUNITY?

By: MICEL SCHNEHAGE

Property developers, investors and parents are taking advantage of a massive backlog in student housing to enter what could potentially be a lucrative investment. There also appears to be a growing trend in the number of private investors and parents climbing on the bandwagon by buying residential units to let out to an annually growing number of students signing up for tertiary education.

This is especially true in academic hubs like Potchefstroom in the North West province, Stellenbosch in the Western Cape, and Grahamstown in the Eastern Cape.

In the past three or five years Grahamstown has seen a plethora of student developments, but these have slowed down considerably. This means, however, that the town now has a healthy supply of potential student housing investments.

Prices and rentals on student accommodation vary:

  • R485 000 for a 39 m2 one- bedroomed unit close to Rhodes University with a rental return of around R3 800 per month,
  • R800 000 for a 50 m2 two-bedroomed unit with an income of R6 048 per month, and
  • R950 000 for a 93m2 three-bedroomed flat with a rental income of around R7 500 or more monthly

Properties in Grahamstown have increased in value over a three to five year period, which means that parents have not only recovered their money from their initial investment but have saved on accommodation for their student children. Some parents sell the units once their children leave the university, and some retain their investment and purchase other property to increase their portfolios with a variety of rental options. This is also due to confidence in the local market.

Investors comprised local, national and international buyers, including the parents of students. Others included academics, businesses, or retiree’s seeking a good return on their investment. The number of rental defaulters on students is less than on other residential properties being leased, as students usually have a set rental budget. Many students are allocated fixed budgets in terms of bursaries and other financial assistance.

In Stellenbosch there are 12700 investment opportunities in student accommodation, with 6 000 of them being in the sectional title sector. That tells you how huge the apartment market in Stellenbosch is.

Stellenbosch experiences an annual “apartment season” starting largely in September through to November, where owners of these apartments wanting to dispose of their assets put properties on the market and those seeking student housing put in offers, including parents of prospective students. If you put in an offer in September, then you have October, November and December for transfer. Rental renewals usually occur in the same preceding months for the following year. Those choosing to hold onto their investments can then sign new leases in December for the following academic year.

Prior to the 2008 global economic meltdown, buyers were mostly investors seeking a yield on their investment. But that has changed. Right now, we have more parents buying than investors.

You will buy a two-bedroomed apartment very close to the campus, let’s say for R1.5 million, and you will only rent it out for let’s say R8 000 a month. If you go and borrow R1.5 million from the bank, your bond payment will be R15 000. So investors hoping to make a quick buck will be out of luck. Investments in Stellenbosch properties for rental to students will need to be long term.

The average turnaround time for selling property obtained by parents with a view to getting a return on their investment is seven years. Now if you have a child (at university) and the rent you are paying is basically just your rent and you sell that apartment after seven years, you will most probably end up with your capital growth that you’ve earned, and that’s paid for your child’s education. That is why parents are still buying.

The continual flow of students going to varsity and those leaving annually is tantamount to a constant flow of supply and demand, making this market a lucrative one. What has also happened in many instances is that demand has outstripped the supply due to an increasing number of students enrolling for tertiary education. This has in some cases, certainly in Stellenbosch and Potchefstroom, led to prices skyrocketing.

Having, for example, two offspring at varsity at the same time, could set you back R8 000 a month which amounts roughly to an R800 000 bond. While cities like Potchefstroom have in many ways been able to expand, towns like Stellenbosch are limited because of the surrounding winelands making expansion impossible. These are factors that lead to even higher price hikes in terms of demand and supply.

A ministerial committee on student accommodation recently released a report on the growing need for housing, saying of the 530 000 scholars who registered in the past year or so, universities were only able to provide lodging for 100 000 students or 18% of those who registered.

Student accommodation is turning into a niche market. Some developers are entering into partnerships with universities like Tukkies in Pretoria and the University of Johannesburg (UJ) in providing adequate student accommodation.

There also appears to be a move away from the dormitory-like housing of yesteryear, making way for so-called student villages comprising suites of three, four or five bedrooms, a kitchen, lounge and ablutions.

Student accommodation is a growing phenomenon due to demand. In many instances, traditional residences provided by tertiary institutions in the past had fallen into disrepair and were costly to renovate.

Many parents had taken it upon themselves to purchase residential units ahead of their children going to varsity, with a view to letting them once their offspring had graduated. This has led to prices near these places of learning to skyrocket.

It has also provided developers and investors with an opportunity to invest in a growing market. This phenomenon is not unique to South Africa, with developers in the Netherlands, for example, turning to discarded freight containers to create funky student villages.

Investors have shown a keen interest in acquiring student accommodation as there is still room for growth. An older two-bedroom unit selling for R665 000 will quickly draw tenants a monthly rental of aroundR5 000. An investor who paid a 20% deposit would thus comfortably cover his bond of about R4 600 per month and the monthly levy of around R350 with his rental income.

There is a rapidly growing portfolio of student flats in Johannesburg, Durban, and Port Elizabeth that it has created largely by refurbishing existing mothballed office blocks.

A higher education ministerial report on student accommodation has called on universities to enter into partnerships with the private sector to address the current shortages in metropolitan areas. Developers and investors are doing exactly that.

The report indicates that there is definitely a gap in the market for safe, secure, and affordable student accommodation close to university campuses and other academic precincts.