Alternative investment advisor sees benefits from secular demand trends
The past few weeks have seen high anxiety among investors in commercial real estate as the 2022 surge in interest rates, the rise of remote work, and a massive shift in people’s lifestyles have pushed the sector into a downturn. But across the alternative investment universe, one top advisor sees a pocket of overlooked potential.
“Compared to multi-residential, self-storage, and senior housing, I think student housing has always been the poor child in the larger family of real estate investments,” says Francis Sabourin, portfolio manager and investment advisor at Francis Sabourin Wealth Management with Richardson Wealth. “Nobody has really cared about it in Canada, especially because it’s so fragmented.”
Purpose-built student accommodation, Sabourin says, is a well-developed asset class in the USA, UK, France, and Australia. While many Canadian pension funds have exposure to student housing, they have given short shrift to the domestic PBSA sector as the opportunities for investment are too scattered.
“It’s a good diversifier for the normal 60-40 portfolio, and event within a typical real estate investment portfolio,” he says. “We don’t have too many vehicles to invest in student housing within Canada, but now we’re seeing investors show some kind of interest in this subsector of the real estate world.”
From a demand perspective, the market for student housing in Canada is strong given the stream of immigration into the country, including those coming in for higher education. Drawing from data from Statistics Canada, the latest Canadian Student Housing Overview report from Cushman and Wakefield said that over the 10 years up to 2021, international students represented 18% of the total stream of post-secondary enrolments and graduates.
The COVID crisis created challenges across the real estate investment world, but some managers within the PBSA subsector proved relatively resilient. And while international student enrolment dropped in 2020-21 due to travel restrictions, increase offerings of online courses, and other factors, that trend is reversing.
“As students have returned to campus, the demand for accommodation has also increased in the last year,” Cushman and Wakefield said in its report. “Despite marginal enrolment growth between 2021 and 2022, student housing and apartment rentals in major markets have seen significant reductions in vacancy rates, reversing impacts of COVID.”
Over the next five to 10 years, Sabourin anticipates more international students will choose Canada over the U.S. given the relatively lower cost of living. And with supply-demand pressures that could worsen if left unaddressed, he sees student housing as an interesting niche.
“It’s high-maintenance in the sense that students need to have facilities to support socialization and community,” Sabourin says. “Student housing lies somewhere between multi-residential real estate where you don’t really bother with that, and senior housing where tenants really need activities to stay engaged throughout the day.”
Another unique aspect of PBSA is the higher tenant turnover relative to other types of housing-focused investments, as tenants typically graduate and move on after a few years. But the beauty of that turnover, Sabourin says, is that it opens up more opportunities to raise rent and revenue in line with inflation.
“Inflation also has an impact on costs, but it’s not as big or as quick as the effect on rent,” Sabourin says. “With inflation starting to ease, we’ll obviously see rents increase less. But we also expect interest rates will go down at some point, which will be good for cap rates across real estate categories.”
At the moment, Sabourin generally regards student housing is a buy and hold strategy within portfolios, with the ability to generate income alongside stable growth. He prefers to get PBSA exposure through managers that specialize in the subsector rather than all-in-one real estate funds, which could make understanding the underlying focus and strategy more challenging.
He adds that the current strong investor demand for student housing exposure means it’s liquid compared to many other alternative investments, though that could change later on.
“We might take some profits to allocate to other sectors down the road, but we like the non-correlated return it provides to the equity and fixed income market,” Sabourin says. “For us, it’s very important right now.”
