+33(0)173101995Thanks to a positive economic backdrop and a pickup for houses as well as businesses, the construction market continues to grow on a national scale, increasing by 13.5% per year. Faced with the demand for student housing, alternative products are outperforming conventional assets. What more is needed to solicit interest from investors looking to diversify?
The French housing market, driven by sustainable economic growth, is enjoying steady growth. It has increased by 13.5% on average per year between 2014 and 2017, however, the portion of residential housing construction has remained stable in recent years.
Today, the situation has changed. With declining prime returns rates on all property assets, institutional investors are shifting away from conventional residential offerings to more profitable alternative products. In this market segment, student residences are now popular amongst investors, especially since, unlike so-called conventional property assets (offices, residential housing), these service assets are unaffected by the ups and downs of the economy. With an annual growth rate of 1.15% per year over the last fifteen years and some 2.7 million students expected to arrive in France by 2020, the market promises to be resilient. Not to mention the 300,000 foreign students who come to study in France every year. The proportion of foreign students should also rise from 10.9% in 2003 to 17% in 2025.
In their search for housing, students look first and foremost at price, and therefore towards economic housing. They prioritise location, preferring proximity and/or direct transport links in relation to their place of study. In terms of socio-economic and demographic criteria, property as well as market depth and equipment rates determine the ranking of the most popular French cities: Rennes, Nantes, Paris and Bordeaux and Toulouse took the top spot in 2017.
Insufficient supply for the student housing market
A lack of supply means that the student housing market is showing strain. In Paris for example, the ratio of supply and demand for student housing is 1 :5. Today, only 32% of 660,000 scholarship students can be lodged in university housing which means the rest have to fall back on the free housing sector which takes in 45% of students.
This shortage can be seen across almost all regions which have a university campus, to differing degrees. In order to cope with this steady rise in students, the construction of student housing should increase by 33% in 2020.
Developers and operators are more interested in this product than ever before, especially in the Paris region and in cities like Bordeaux or Toulouse which are catching up quickly.
A limited risk for investment
For investors looking for more diversification, student housing continues to perform well and offers great advantages. The starting price is much lower than that of conventional housing, at between €100,000 and €150,000, and the acquisition of a student housing residence means the full VAT amount can be recovered, or 20% of the property price. The commercial rent model is favoured for minimising risks, whereby the landlord rents to a manager who solely carries the risks of unpaid bills, vacancy or building costs. The investor should seek to assure the landlord's financial viability, and the site potential for future resale.
In the Paris region, for example, property developers, attracted by a high returns rate, dominate the market. With the standardisation of housing, essentially one-room studios of 15 to 25 m2, developers can make full use of the economies of scale to reach the size needed (between 50 and 200 homes) and optimise the project’s profitability. Buildings in compliance with new energy standards are more than three storeys high in order to help reduce land acquisition costs. Therefore, these student residences fulfill the criteria while differentiating themselves from CROUS public residences, which are intended for scholarship students with more advantageous rents.
Other forms of service residences such as ‘co-living’ are also developing. This intermediary product which is categorised somewhere between a cohabitation, youth hostel and student housing, has communal areas and other restoration services or workspace rentals, to provide other sources of income aside from rent. In this market, BNP Paribas Real Estate estimates that the proportion of additional services in a co-living residence is close to 40%, compared with only 20% for student housing.