REITs give student housing the old college try

LOS ANGELES — College campuses have become home to a growing real estate investment category as student housing attracts more attention from investors, according to a new study by Deutsche Bank’s RREEF Research arm in New York.

Off-campus student housing as an investment is a relatively recent phenomenon, spurred by three real estate investment trusts created over the past three years. This development has led to more investor awareness and a bit more transparency.

Still, data are scarce, because most of the players are private businesses loath to share information on occupancy rates, rents and costs, the report noted.

Among other risks: a short leasing cycle that matches the school year, little turnaround time to refurbish units, high turnover, limited reuse potential if the student housing market should drop out of favor and heavy reliance on a single source of demand — sometimes-finicky students.

But there are opportunities, as well, not the least of which is demographics, the report said. College enrollment nationwide is expected to rise, with an average of 4.2 million children turning 18 each year over the next decade, compared with an average of about 3.3 million turning 18 during the 10-year period ended 1997, according to RREEF and the National Center for Health Statistics in Washington.

Also, two out of three high school graduates attended college in 2004, the latest year for which statistics are available, compared with 45% in 1960, and almost 3 million students will enter college each year over the next decade, the study noted. The National Center for Educational Statistics in Washington forecasts college enrollment of up to 20.3 million in 2015.

Universities are struggling with the increased enrollment. On-campus housing capacity at four-year colleges fell to 24.8% of undergraduates in 2004, from 32.2% in 1990, RREEF Research estimates.

States with the highest college enrollments — such as California, Texas and Florida — house only about 20% of undergraduates on campus.

Other attractive aspects of student housing include rents and sale prices, which are higher than those of conventional apartments, according to the report.

“Their purchase price is about [0.5 to 0.75 percentage] points higher than [that for] apartments, and apartments have been bid down aggressively lately,” said Alan Billingsley, director and head of North America research for RREEF.

“But it’s less volatile,” he said. “Student housing has somewhat better returns and less risk.”

RREEF’s core fund is considering investing in the investment category, Mr. Billingsley said.

“It’s a captive audience,” he said. “And parents co-sign [the leases], so it’s a better credit than apartments.”

What is less clear is return performance for the sector, compared with that for traditional real estate, the report acknowledged. There are only two pure student housing REITs, and both have been on an acquisition binge over the past two years.

By far, the biggest players in the sector are three REITs, which collectively had expanded their portfolios to 133,200 units as of Feb. 28, from 47,200 as of Dec. 31, 2004, the study stated. American Campus Communities of Austin, Texas, was the first public student housing REIT, launched as an initial public offering in mid-2004.

Allen & O’Hara Construction Co., an Olive Branch, Miss., builder of motels, churches and corporate headquarters, as well as dormitories, filed its IPO in early 2005 and changed its name to Education Realty Trust Inc. of Memphis, Tenn. GMH Communities Trust of Newtown Square, Pa., which owns student and military housing, went public in mid-2005.

All three REITs also manage on-campus dormitories for public universities. For example, Education Realty Trust manages student housing for the University of North Carolina at Chapel Hill, The University of Illinois at Urbana-Champaign, the California State University System and the Pennsylvania State System of Higher Education, according to information on its website.

These three REITs are gobbling up student housing projects at a fast clip. Last year, half the student housing buyers were REITs, with private investors the most active sellers.

Investment volume has grown in six years. More than $2 billion of student housing was sold in both 2005 and 2006, up from $6.3 million in 2001, according to real estate research firm Real Capital Analytics Inc. in New York.

In the first two months of this year, 14 student housing properties were sold for $371 million, creating an annualized volume of $2.2 billion in the first two months of this year.