‘Living’ now the preferred sector for institutional investors

AUSTRALIA 18 MARCH 2024 – A new JLL Report has found that ‘Living’ sectors accounted for the largest share (27 per cent) of global transaction volumes in 2023, outpacing traditional commercial property sectors.

‘Living’ includes investment categories such as BTR, student accommodation, co-living and senior living product.

JLL’s report, Student Accommodation’s role in a living sector strategy: Australia’s purpose-built student accommodation sector (PBSA), found interest in the PBSA sector has gained momentum as operational metrics recovered faster than anticipated post-COVID as rental growth and student numbers strengthened, driving a re-allocation of capital into the sector.

Report co-author, Ronak Bhimjiani​, Director, Real Estate Economist – Australia, noted that total international student numbers had fully recovered in 2023, exceeding the previous 2019 peak by 4 per cent, fuelled mainly by China and India, as well as exceptional growth in student numbers from the Philippines which were up 107 per cent, Colombia 94 per cent and Pakistan 54 per cent.

“The diversification of international student demand and the decreased dependence on a single country as a primary source helps to mitigate the effect of any potential risks that may arise from policy changes, and provides greater confidence around future occupancy projections,” he said Bhimjiani said the increase in student numbers had driven a notable increase in forward booking rates for student accommodation over the previous 18-24 months, with operators recording a sharp uptick in demand.

“Students, eager to secure suitable accommodation and avoid the risk of missing out, are actively seeking options ahead of time,” he noted. “As a result, leasing campaigns for future semesters have been commencing earlier than in previous years. Such forward-looking indicators drive investor confidence, signifying a promising outlook for continued rental and occupancy performance of the PBSA sector,” Bhimjiani said.

Andrew Quillfeldt, Head of Capital Markets Research – Australia noted that Australia’s tertiary institutions have garnered significant international recognition for their high quality and academic excellence.

"Adjusted for total student population, the Australian education system presents a compelling case when compared with competing markets such as the UK and USA. Out of all students studying in Australia, 22.3% attend a top 100 university, whereas in the UK and USA, these figures are 20.9% and 3.9% respectively,” said Quillfeldt.

The private rental market nationally remains tight, with the residential vacancy rate declining to historic lows, currently at 1.1%. Once Australia’s already tight rental accommodation market was also factored in, the PBSA market is well positioned for robust, long-term rental growth.

However, while limited supply would drive rental growth, the significant mismatch between supply and demand – with an estimated undersupply of around 7,000 beds per annum over the next five years – remained a very challenging development environment.

Jack Bergin, JLL’s Head of Living, Capital Markets said: “While demand is obviously there, as is rental growth, the pressures from high construction, finance and land costs are impinging on development margins and impacting viability.

"Strong operational performance in capital cities is boosting investor confidence, the challenge for capital remains deploying at scale while reducing exposure to development and planning risks, we expect new entrants to be more attracted to turnkey and fund-through solutions to enable this, as we have observed in more mature global markets," Bergin said.

The report found the surge in investor interest over the previous 24 months had seen new players enter the market and existing players expand portfolios and increase their exposure to living sector real estate.

“Australia presents a compelling case for PBSA investors through relative value, geographical diversification and the opportunity for operators to steadily grow their platforms by capturing a greater share of the rising number of international students,” said Tommy Christian, Associate Director, Living Capital Markets.

Christian said, “In addition to the structural demand drivers and the cyclical recovery in occupancy and rental growth, investors have been attracted to the inflation-linked nature of the PBSA sector, with the ability to capitalise on the rent reversions via shorter term leases.”