Investors wake up to Spain's student bed opportunity

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junio 04, 2018

Real estate investors searching for yield are turning to Spain’s burgeoning student accommodation sector as the current supply falls short of demand.

Spain has witnessed a sharp increase in the number of people studying at university level, which coupled with official estimates of an 11 percent rise in the population of 18 to 24 year-olds between 2018 and 2025, is fuelling the development of purpose-built accommodation by the private sector.

So far, however, the number of developments has been insufficient to cover the shortfall, with many students unable to secure a place at a student residence. JLL estimates that the unmet demand totals around 380,000 students.

Although some accommodation is owned directly by universities or operated by religious orders, the vast majority is in the hands of private companies – and they continue to lead the charge.

“In the last three years there has been a huge amount of interest in Spain’s student accommodation market from both foreign and Spanish investors,” said Nick Wride, Head of Living & Alternatives at JLL in Spain.

“In mature student housing markets like the UK and Germany returns are being squeezed, whereas Spain offers very good student-to-bed ratios and attractive yields.”

Prime yields sharpened by 50 basis points between the fourth quarters of 2016 and 2017, yet at 5.25 percent Spanish student accommodation still offers more attractive returns than all major real estate sectors in Spain other than logistics (at 5.5 percent).

According to Wride, investing in student accommodation requires more work than traditional property sectors, “but with returns being squeezed elsewhere, it is well worth developing an understanding of the maintenance and service provisions that are included in student housing leases.”

Regions on the up

Up until 18 months ago the focus was on Madrid and Barcelona, but investors are now looking towards undersupplied regional cities such as Valencia, Granada, Malaga, Seville, Pamplona and Salamanca.

Rents in the regions tend to be lower than in Madrid and Barcelona, but it is easier for investors to find development space at a reasonable price.

Real estate investment firm, Corestate, which will shortly complete its first student residence in Spain in the heart of Madrid’s Ciudad Universitaria area, has acquired a plot of land next to the Sánchez-Pijuán stadium in Seville where it plans to build a new 413-bed residence, due to open in 2020. And in Valencia, a high-quality student residence with 350 studio apartments, developed by Princeton Investments and WP Carey, is set to open in 2019.

Timing matters

For new investors, it isn’t too late to get in on the action. Around 328,700 students in Spain are enrolled at universities outside their home province, 98,741 are from abroad, and 45,813 are on the Erasmus student exchange programme – yet there are only 93,600 purpose-built student beds in the country.

“There is a still a lot of room for new developments, provided the product and location is right,” said Wride.

Domestic students tend to want fully-catered accommodation on campus, whereas international and postgrad students prefer self-catered city centre studios. In Madrid, students are often willing to pay €1,000 a month for high-end beds with extra services and amenities, but in the regions there is more demand for mid-range offerings.

But, investors also have to get the timing right, said Wride. “If they don’t open in time for the new academic year in September, it will be a lot harder to fill up beds. And poor first year occupancy figures can be damaging to a portfolio.”

There are other challenges too. It can be harder to gain traction if developers don’t have an office on the ground, and finding sites can be difficult. Last year saw the sales of the RESA and Nexo portfolios (the latter advised by JLL), but with no portfolios currently on the market at present, the focus of activity in the short term will be on site acquisitions for new developments.

Wride said this could start to change from 2020 onwards because a lot of developments are backed by private equity firms, which require returns after five to seven years.

“Once the new properties are in operation and have stabilized, I expect to see portfolios of student accommodation coming to the market, thereby attracting more institutional money in the sector,” he said. “Overall, we’re seeing a huge increase in the number of new student housing developments in Spain – and that’s expected to continue throughout 2018 and 2019.”

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