Student housing real estate investment trusts (REITs) are likely to start buying properties soon—as soon as more properties become available.
“You’re going to see acquisitions heat up for REITs over the next two years,” says Scott D. Lamontagne, managing director for JLL’s multifamily capital markets group.
That’s because REITs eager to buy student housing properties will soon have more stabilized, new properties to choose from. Student housing REITs have already raised the capital to invest. But until a wave of new developments are finished, stabilized and available to purchase, there are relatively few student housing properties to buy. Instead, for now, top student housing REITs are planning new developments and investing in their existing portfolios.
“The biggest difficulty is just finding properties to buy,” says Lamontagne. “We are still fairly early in the cycle from an acquisitions standpoint—there has not been a tremendous amount of delivery of new properties.”
That will change over the next two years. The 60,000 new student housing beds that opened in 2014 and the 50,100 new beds created for fall 2015 will soon be fully leased, so that the stabilized properties can be put up for sale. “Most of those assets are being built on the merchant builder model,” says Lamontagne.
REITs have also gathered a large amount of money to spend. “REITs a definitely active in raising capital,” says Lamontagne. So far, equity REITs are on track to raise $37 billion in secondary offerings in 2015—significantly more than the $31 billion raised in 2014. The largest student housing REITs, EDR, ACC and Campus Crest, have all raised money through these types of offerings since 2011.
REITs have been able to raise this money despite a difficult year so far on the stock market. So far this year, student housing REITs have generated a median total return of negative 9.5 percent, including both dividends and falling stock prices, according to analysis by SNL Financial. The two largest student housing REITs have provided a median total return of negative 8.2 percent. That’s compared to a median return of negative 2.6 percent for equity REITs overall.
Despite declines in stock prices, REIT executives are confident in the coming year. "Fundamentals in the student housing industry and within EdR's markets remain strong," stated Randy Churchey, EdR's chairman and CEO. "Our preleasing velocity for this fall continues to outpace last year, and we anticipate a second consecutive year of significant decline in new supply volume in 2016.”
REITs not buying much… so far
So far this year, student housing REITs have focused on growing their funds from operations by developing new core properties and improving the income from properties that they already own. Overall, REITs haven’t focused on buying stabilized student housing properties.
“REITs have been prolific developers of student housing,” says Lamontagne.
For example, ACC has been a net seller this year. The REIT sold $404.6 million in student housing properties in 2015 through the end of the second quarter compared to just $304.4 million of purchases.
“The majority of ACC's dispositions so far in 2015 have been focused primarily on the Southeast,” Jason Lail, manager of real estate research for SNL Financial. ACC has also been a busy developer of properties, with a development pipeline valued at $550.5 million at the end of the second quarter.
EdR also continues to buy and built new properties—though mostly on the development side, with new agreements to create more than a thousand new beds. "Portfolio growth continues to be robust, as evidence by the two acquisitions and the additional 2016 development delivery announced today," stated Tom Trubiana, EdR's president. With the newly announced development and acquisitions, EdR has embedded external growth through 2017 of $590.1 million, which represents a 33 percent increase in collegiate housing assets over December 31, 2014.
Student housing discount
Student housing is becoming more accepted as a mainstream property type—but it isn’t quite there yet. Student housing REITs overall currently trade at a median -12.3 percent discount to their net asset value. The two largest student housing REITs, EDR and ACC, currently trade at a discount of -10.5 percent. That’s compared to a median -9.4 percent discount for equity REITs overall.
Individual student housing properties also sell as slightly lower prices than conventional apartments, relative to the income produced by the properties. Typical capitalization rates, which represent the income from a property as a percentage of the sale price, tend to be about 25 basis points higher for student housing properties than conventional apartments. During the last real estate boom, the difference was even more pronounced, at about 50 to 75 basis points. “The spread used to be much wider,” says Lamontagne.