Purpose-built student accommodations are in short supply across the region, but some investors and developers find them very attractive. However, due to the recent dramatic economic changes, companies need to adapt to tougher business conditions and adjust their development pipelines accordingly, says Bálint Botos, Managing Partner of Forestay Group.
Recent economic developments are not in favour of a big wave of constructing student centres or converting old buildings into such properties. What is your assessment of the present macroeconomic circumstances that affect your business as a developer and asset manager?
I have mixed views regarding the recent macroeconomic developments. On the one hand, it is great that there are some rational considerations regarding travel, energy consumption, imports of goods, etc. The previous, low prices have not reflected the real externalities of energy and material costs, consumption was too great; a consumer society has formed instead of conscious consumerism. High energy and construction prices will bring a new way of life: these will affect how we live, how we travel, how we commute, and what we value. It will take a while to get used to it, but that new era shall bring many benefits. In that context, student housing is a very progressive, future-proof asset class. These buildings are efficiently designed: space utilization is maximized; energy consumption and operation needs are minimized but the social aspect still plays a very important role. These are the buildings of the future having very high ESG values.
On the other hand, current economic trends put serious pressure on purpose-built student accommodations (PBSA) considering increasing construction costs and decreasing operating margins due to piking energy and staff costs. These can be mitigated with new solutions, which we are already implementing at our existing Dean’s College Hotel student accommodation.
The rising financing costs create another challenge, but that has to be viewed in a wider context. We have higher financing costs, because of high inflation, which will drive up the income of our PBSA as well, but also puts pressure on the yields (as it is supposed to). But in the medium term, either the yield compresses again as inflation will cease to exist, or inflation continues to drive the income higher (but yield does not follow it anymore).
I believe that in the current environment the feasibility of some of the planned projects needs to be heavily scrutinized and plans need to be reconsidered, therefore a professional development manager and operational partner will be key to moving projects forward.
At our PBSA project already in operation, we overcome these challenges by having designed an efficient and green building and having introduced several cost-saving measures during operation: such as IT and mobile solutions, cross-functional training for staff, and reformed cleaning and servicing which all help us save on energy and staff costs-while keeping guest satisfaction high.
Proper student accommodations are in short supply across the region. Which country may be the frontrunner in having substantially more such properties within the next 3-5 years?
The CEE region in general is heavily under-supplied regarding BTR and PBSA properties. This short supply is a heritage from the privatizations taking place in the 90s and the slow mindset change of the citizens and government policies.
Poland has got the head-start in PBSA development because of an overall greater attractiveness for international investors than other CEE countries due to its market size, regional cities with over 300 thousand inhabitants, good universities, as well as relatively quick planning and permitting processes.
The Czech, the Slovakian, and the Hungarian markets are each quite small in size where one player can easily build up a strong position while others can only follow its lead. Every country is unique regarding taxation, housing rules, university connections, etc., which makes it difficult to enter the markets of several countries simultaneously.
Our PBSA, the Dean’s College Hotel with over 400 rooms has the best site in Hungary, located only 20 meters from Semmelweis University and we have other large-scale projects in the pipeline. We will focus on those in the year to come and consider the start of developing other opportunities only afterwards. While others will probably focus on the Polish market therefore the CEE countries will likely develop parallelly to each other.
We have faith in the sector and our long-term strategy is to focus on this asset class, as it represents good opportunities for the developers with the right standards, professional development management team, and strong operational background to cover the lifecycle of the whole project comprehensively.
How about the potential demand over the next 3-5 years in CEE and Hungary in particular?
The demand is high for build-to-rent (BTR) real estate in CEE, and we expect even stronger demand for several reasons. With the increased residential prices, rising mortgage costs, and a different – more flexible – way of living to some extent, people of all ages are now more seriously considering renting rather than owning.
Despite the high demand, the market is in its infancy, which is due to the lack of operating and transaction benchmarks for student housing projects. The supply is expanding rather slowly, with a few thousand yearly new BTR supply in CEE, the market is hardly closing in on its equilibrium.
Banks and equity partners are more reluctant to finance such projects because they are unsure of the potential operating results and exit pricing. They usually bet on the more traditional asset classes with existing benchmarks, even though some of these classes can be easily obsolete.
In some countries, governments support the construction or refurbishment of state-owned student houses thus taking away part of the possible demand for private student centres. Is it a real threat or you are not worried about that because the number of international students is still growing, providing enough demand for private developments?
In an ideal world, a country has a strategy for higher education including both local and international students. The state-owned universities have the kind of monopolistic positions in higher education and as such, they could produce very lucrative returns. While a PBSA is just a property, providing a 5% yield. This yield is ideal for a pension fund or other institutional investor but produces a much lower return than a well-operated university and it is also lower than the CEE countries' debt service cost. Therefore, the ideal scheme would be to have well-operated universities with both local and, international students, and these universities have professional, specialized partners in housing.
The state-owned, renovated student houses are usually functionally so outdated that new heat isolation, HVAC installation, or decreasing the number of beds per room cannot elevate them to the same level as what the market offers. Our student house provides a different living experience for the students from what they would have at a state-owned house. What differentiates our product from state-run properties are the quality of finishings, higher standards of operation, and the wide array of services that we provide to our residents. It is more fun to stay with us and students nowadays value being able to belong to a community and socialize more.
Do you agree that senior housing could be an alternative for investors and developers as demand in that segment will keep growing fast?
Senior housing is a very special sub-sector of BTR, requiring special skills due to its healthcare aspects. However, there is a shortage of these projects as well in our region, therefore I agree that it could be a segment that represents good opportunities.
As costs are rising in the whole property market across the region, rental prices are also affected, including private houses and student centres. How does it affect your pricing to be competitive?
We were able to increase our prices for the next semester even in real terms. However, costs are rising too, especially the energy prices have increased much faster recently due to global events. Therefore we are introducing more measures to reduce the impacts on our bottom line starting with new protocols and continuing with CAPEX spending which will significantly decrease our energy consumption or increase other efficiencies.
PBSA properties are generally designed to be highly efficient in terms of energy utilization but with the higher energy prices, when designing a new property, the energy efficiency requirements will increase even more.
We have a per-student electric bill which is half of what a student would pay at a privately rented studio apartment; we use distance heating producing zero local emission and several other factors which all together create a system where a per-student carbon footprint is way lower compared to other living options.
Investors concentrate on yields which is a normal approach. But today we live in unusual times. How could you minimize your risk and maximize ROI?
Risk is an interesting aspect. Generally, the risk is measured in standard deviation or value-at-risk, but in recent years most of the risks were new, kind of black swan events. The BTR, and especially the student housing sector overall had the chance to prove its resiliency, but a lot depends on the operation team as well. Ownership mentality, creativity, and professionalism of the management team were a must to survive. Our team has reacted exceptionally well to the challenges and we made significant progress in recent years.
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