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HNW Investors Love Student Housing, Though Attractive Deals Are Getting Harder to Find

Private investors, including HNW investors and family offices, accounted for the largest transaction volume in U.S. student housing from 2010 to 2016.

When it comes to real estate investments, high-net-worth (HNW) individuals and family offices have been going to school: in recent years, more of them have been adding student housing to their portfolios.

However, some observers say that the interest of HNW investors and family offices in student housing is tapering off as other investors elbow their way into this asset class.

Private investors, including HNW investors and family offices, accounted for the largest transaction volume in U.S. student housing from 2010 to 2016, says Jaclyn Fitts, director of student housing at commercial real estate services company CBRE. From 2014 to 2016 alone, the dollar volume of transactions in the sector shot up from $3.0 billion to $9.8 billion, says Fitts, citing CBRE’s internal tracking data. CBRE predicts this year’s volume will be about the same as last year’s.

So far in 2017, private investors represent a sizable share—by some accounts, 35 percent to 45 percent—of transaction volume in student housing. However, Fitts says, the percentage is declining as more institutional and international investors target this asset class.

Al Rabil, managing partner and CEO of Kayne Anderson Real Estate Advisors, says that as student housing has attracted more institutional capital during its maturation from an alternative asset class to a traditional asset class, his firm’s enthusiasm for the sector has waned a bit. Clients of Boca Raton, Fla.-based Kayne Anderson, which has $4 billion in assets under management, include HNW investors and family offices.

Rabil says he and his Kayne Anderson colleagues “love” student housing, but the opportunities there just aren’t as robust as they had been. He expects the make-up of the firm’s fifth investment fund to match that of the previous fund—about 90 percent in medical office and 10 percent in student housing.

Why isn’t Kayne Anderson investing more money in student housing?

Aside from the rise of institutional investors in that asset class, Rabil notes that student housing is a much smaller sector than medical office ($300 billion) or seniors housing ($1.5 trillion).

“This is a major shift from five to 10 years ago, when we spent a tremendous amount of time explaining the dynamics of the sector to our investors,” he says.

Furthermore, there’s the challenge of finding appropriate sites for purpose-built student housing, he notes.

“There are only so many physical sites that are [near] large, big-name schools, which is what we are targeting. As such, we are limited in our opportunity to develop by geography and actual space.”

Despite such constraints, student housing remains an attractive asset class for HNW investors, family offices and a host of other buyers, observers say.

Among the factors drawing investors to student housing are rising college enrollment rates, the sector’s recession resilience and the healthy yields. Investors in student housing enjoy a 57-basis-point yield premium compared with investors in conventional multifamily properties, according to Fitts.

Student housing earned plenty of “street cred” during the most recent economic downturn, thanks to its sterling performance compared with other asset classes, says Ryan Lang, executive managing director and head of student housing at Atlanta-based investment advisory firm ARA Newmark.

In terms of operating results, student housing is a “steady Eddie,” without too much downside risk, says Paula Poskon, president of Washington, D.C.-based STOV Advisory Services, whose real estate specialties include student housing.

Today, Lang and others say, most student housing investors are leaning toward value-add or core new construction assets that are pedestrian-to-campus or adjacent-to-campus. Most of these projects serve students at top-tier universities, including the University of Texas at Austin, the University of Florida and the University of South Carolina.

A lot of HNW investors, family offices and other investors are seeking to achieve scale by amassing portfolios of off-campus, purpose-built student housing, rather than just one-off purchases, Lang notes.

As of late September, ARA Newmark was handling 45 student housing transactions in the U.S. that were either under contract or on the market, he says. Close to one-third of those deals are expected to involve HNW investors and family offices.

Looking ahead, student housing is “going to continue to be strong,” Lang notes, thanks to the ongoing growth in college enrollment and the aging of student housing stock.

“There’s a lot of dynamics about the sector that investors at that level [HNWI and family offices] find appealing, particularly as we remain in a very low-yield environment,” Poskon says. “There’s just not a lot of other options for that. You have to go so far out on the risk curve to try to find yield.”

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