Canada’s purpose-built rental market has seen its share of healthy investment activity over the years, yet one asset class – student housing – has historically struggled to keep up. Look no further than a Colliers investment survey from 2016, which found that no Canadian investors among the 600 participants had plans to put money in these much-needed residences, preferring to stick with shopping centres, office space, industrial facilities and other commercial real estate ventures known for their steady returns.
Not the case in the U.S. or the U.K, where the market is far more developed. In fact, globally, the purpose-built student accommodation sector (PBSA) represents a $200 billion segment.
So when will investors in Canada start to take notice? According to Alignvest Management’s new dedicated student housing REIT, “ASH REIT”, the answer is, they already are.
Launched in July, 2018, ASH REIT opened with over $65 million in capital commitments and describes itself as “a proven global investment strategy with a substantial first-mover advantage to consolidate and professionalize student housing in Canada.”
“Currently, only about 3 per cent of Canadian university students live in off-campus purpose-built student accommodation compared to 10 per cent in the U.S. and 12 per cent in the U.K.,” said Sanjil Shah, ASH REIT Managing Partner. “We are 10 to 15 years behind those markets, even though our student population is growing at a much higher rate fueled by both domestic enrollment and our increasing share of international students.”
Before launching the REIT, Shah and his team spent three years researching the student housing industry and found that the limited funding to Canadian universities was affecting their ability to provide enough beds to meet the increase in demand. As a result, the group recognized that a unique market opportunity was upon them to acquire, build and operate high-quality, institutional-grade PBSA assets.
“We believe that there is a need for a professional owner/operator of purpose-built student accommodation in Canada,” he said. “Canadian universities are well-respected around the world. Our objective is to ensure that the total student experience, including their residential component, is very positive. We believe that we can provide this positive experience with a strong understanding of the industry and at the same time generate attractive returns for our investors.”
Acquiring student housing assets
In August, less than a month after announcing the REIT’s official launch, ASH REIT completed its first purchase of a purpose-built student residence located at 181 Lester Street in Waterloo, Ontario.
“This building represents a cornerstone of the Alignvest Student Housing acquisition and operating strategy,” said Jonathan Turnbull, Managing Partner. “We believe this asset represents the high-end offering discerning students expect, and a performing investment our investors expect.”
The Lester Street property is four years old and strategically located within 500 metres of both the University of Waterloo and Wilfrid Laurier University. Combined, the two universities have over 54,000 students and have experienced a 25 per cent growth in student population since 2010 (including a 161 per cent increase in international students). The 18-storey building has 455 beds in fully-furnished suites, and offers high-end student-oriented amenities.
Just last week, ASH REIT announced it had purchased its second PBSA asset, a three-year-old property located at 111 Cooper Street in Ottawa, known as “1Eleven”. The 16-storey building is within 400 metres of the University of Ottawa and a 10-minute commute to Carleton University.
In keeping with these acquisitions, Shah said ASH REIT intends to offer institutional and high-net worth investors the opportunity to invest in a diversified portfolio of PBSA and participate in the profits derived from them. “The goal is to deliver an attractive quarterly distribution to our investors and generate long-term capital appreciation with targeted returns of 15 per cent plus,” he said.
Targeting a student tenant-base: myths and stereotypes debunked
Anyone who’s ever stepped foot in a student housing residence knows that these buildings operate differently than generic rental properties. For starters, students require unique amenities and live a more socially connected lifestyle than the average renter.
“Student housing is not a passive real estate investment,” remarked Shah. “It is an operationally intensive business. Students are not long-term tenants. We expect a 40 per cent turnover on an annual basis. Also, students expect student-oriented amenities and services, such as study lounges and high quality internet. To deliver these, we incur substantially more operating expenses versus standard residential apartment buildings.”
That said, Shah is quick to point out that the negative reputation students often get slapped with isn’t necessarily true, and nor is the perception that managing student properties is more fraught with challenges than other rental buildings.
“There is a general misconception regarding students,” Shah said. “The common thought is that students are bad tenants; that they have poor (or no) credit and that they will likely trash the property. In reality, with guarantees from parents who can afford the cost of university tuition, the credit quality of our tenants is actually quite strong. In addition, students are respectful. As tenants who are at university to obtain an education, they are not abusive of the premises and we incur very little property damage.”
Contending with shortages
Aside from the occasional bender and pizza sauce slopped on the floor, the bigger concern when it comes to student residences is the massive shortfall of beds – especially in cities like Toronto and Vancouver where affordable rental housing is already scarce, and thousands of students are joining the masses on wait-lists with seemingly no end.
In September, the University of British Columbia revealed plans for a new 1,000-bed residence, which will break ground in the spring of 2019 for a targeted 2021 move-in. But still more is needed. With a city-wide vacancy rate hovering just below 1 per cent, and student enrollment steadily on the rise, the City of Vancouver has taken meaningful steps to help bolster purpose-built rental development – including streamlining the slower-than-molasses permitting process.
In the meantime, Shah and his team at ASH REIT intend to satisfy at least some of that growing backlog…while turning a hefty profit in the process.
Why investing in student housing makes sense:
1. Students have financial backing from their parents, meaning they aren’t a credit risk.
2. Students are more willing to share space with each other (i.e. bathrooms and amenities) than other renters.
3. During periods of recession, undergraduate students tend to stay in school longer, while many graduates return to upgrade their skills, thus increasing demand for student housing.
4. Canadian universities are respected institutions all over the world. Domestic and foreign enrollment is growing at a rate much higher than other countries, meaning the tenant pool is constantly being replenished.
5. Given the high cost of tuition and rent, students are respectful of their surroundings and neighbours, unlike their stereotypes might suggest.