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College-student housing presents investment opportunities

The housing market is still in the tank, but there are investment opportunities in one segment: student housing.

It’s not a risk-free proposition, and it’s far more management-intensive than conventional multifamily properties. But student housing has a long history of growth and stability.

“Demand and supply conditions for housing are bad,” said David Stiff, chief economist with Fiserv, which publishes the Case-Shiller Home Price Index. “But in college towns, demand conditions are slightly better. There’s a stable source of new demand every year.”

There are at least three paths to investment in college housing: individually; in a partnership; or as a shareholder in one of two publicly traded real estate investment trusts, American Campus Communities Inc. and Education Realty Trust Inc.

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An initial public offering is on deck for a third, Campus Crest Communities Inc., which expects to list on the New York Stock Exchange under the symbol CCG.

Real estate investment trusts, or REITs, that are focused on student housing have become investment magnets for large pension funds. Some bigger syndicates have partnerships with larger funds. Campus Advantage Inc., one of the nation’s largest private student-housing companies, is managing and helping to develop properties for the California Public Employees’ Retirement System.

“These investments return pretty stable cash-on-cash yields going in and should continue to hold up in the long term versus other similar product types that might have larger peaks and troughs in occupancy and rental-rate growth,” said Michael Orsak, vice president at Campus Advantage, which manages and owns 50 properties across the U.S., most in the Southeast, Midwest and Texas. The industry measures its size based on beds. For Campus Advantage, that translates into 30,000 beds.

Orsak said most institutions can expect a cash-on-cash yield in the first year of 8% to 9%. “I don’t know where a pension fund can find that today in the stock market or bonds,” he said.

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Though markets differ by campus — large public universities have steady enrollment; smaller schools are growing exponentially — the national statistics on enrollment are strong.

In 2010, a record 19.1 million students were enrolled in two-year and four-year colleges and universities, a 25% jump since 2000, according to the National Center for Education Statistics. That underscores a consistent growth in enrollment that is expected to continue — albeit at a slower pace — until at least 2018, as the last of the baby boomers’ children reach college age.

Coupled with the recession, which has prompted many to go back to school for second and advanced degrees, enrollment in post-secondary schools has rarely been so robust.

Campus Crest, which owns and manages 27 properties, or 13,580 beds, boasts of its amenities in its initial public offering prospectus. All of its properties — which, like Campus Advantage and ACC, are considered Class A — offer what Campus Crest calls “bed-bath parity,” or a private bathroom for each student.

The Campus Crest properties all have Internet access, a full kitchen with up-to-date appliances, washers and dryers inside each unit, ample parking and a broad array of other on-site amenities, such as “resort-style swimming pools, tanning booths, basketball and volleyball courts, game rooms, coffee bars and community clubhouses with regularly planned social activities.” Plus they’re all fully furnished.

“We strive to offer not just an apartment but an entire lifestyle and community experience designed to appeal to the modern-day college student,” according to the IPO documents.

All of these perks cost money, of course, and the monthly price on a student apartment is generally about 10% to 20% higher than on a traditional apartment.

“The tenants are not constrained by real-life economics because, of course, they’re not footing the bill,” said Joung Park, an analyst who covers ACC for investment researcher Morningstar Inc. “Typically the parents are back-stopping the lease too, so there are fewer defaults.”

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The key difference for student-housing landlords is that they charge by the bed, not by the unit, Park said. “That allows them to get a little more on rents because they can put multiple beds in one unit.”

In many cases, charging higher rent is the only way for an owner to turn a profit. Student housing can be a management nightmare, and costs considerably more to operate than conventional multi-family housing. The expenses of operating conventional apartments typically run from 35% to 38% of revenues, according to Orsak. Student-housing sites have expenses that are at least 45% of revenues.

Waters writes for MarketWatch/McClatchy.


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