Parramatta Road, student digs and international caps

The proposed cap on international students in Australia has sparked widespread discussion and speculation about its potential implications for various sectors, including the student accommodation market. While the cap is aimed at vocational education and training (VET) institutions and universities, we feel the effects will hit universities.

The VET sector, which encompasses a wide range of courses from cyber security to childcare, often attracts international students seeking to extend their stay in Australia while gaining practical skills. Many of these students opt for part-time VET courses to balance their studies with part-time work. However, the impact of the cap on this sector is likely to be less significant compared to the potential effects on universities.

What effect will international student caps have in Sydney?

Where the international student caps become interesting is in the sector of vocational training (VET or vocational education and training). Much of this sector has been outsourced for some time and is notorious for ghost colleges and poor training, used often as a ‘back door’ for visa extensions and work permits. Students in VET are not our market for student accommodation. Caps on their numbers, however, could have a slightly positive effect on local housing.

Purpose-built student accommodation is usually taken up by students attending one of the tertiary educational institutions on the Sydney city fringe. While numbers for some subjects (for example, veterinary science) will be capped, many subjects will not be subject to caps.

Universities have a higher proportion of international students seeking student accommodation. Despite the ongoing demand for student accommodation, the cap could lead to a slight reduction in overall student numbers, potentially affecting occupancy rates in some areas. However, it’s important to note that thousands of international students are already enrolled in Australian universities and will continue to require accommodation.

The rental market

The broader rental market in Australia has been under significant pressure, with low vacancy rates and rising rents. This has created affordability challenges for many Australians, including students. Purpose-built student housing, while offering a convenient and often more affordable option compared to the general rental market, still caters to a fraction of the total student population.

Redistribution

The cap on international students may lead to a redistribution of students across different universities and regions. Some institutions in Victoria, NSW and the ACT may experience a decline in international student numbers, while others, particularly in regional areas, may see an increase. This presents opportunities for student housing providers to expand into emerging markets with limited existing purpose-built facilities.

Student accommodation in Sydney City Fringe areas

In our key Sydney City Fringe areas of Glebe, Forest Lodge, Chippendale and Camperdown, the demand for student accommodation remains strong to service the main tertiary institutions of University of Sydney, University of Technology Sydney, Notre Dame University and the Torrens University campus in Ultimo.

Yields in these areas are competitive, reaching up to 6.75%, reflecting the continued appeal of student housing.

The student housing sector in Australia is driven by both domestic and international investors. The ongoing growth in overall student enrolments, coupled with the increasing demand for purpose-built student housing, suggests that the sector will remain resilient even in the face of the proposed cap.

Adaptive reuse for student accommodation?

Most institutionally owned student accommodation is known as purpose-built student accommodation (PBSA). However, the sole investor can find opportunities with adaptive reuse of Sydney city fringe properties.

Since the pandemic, we’ve seen an increasing clamour for empty offices to be converted to residential. While we’ve seen some ex boarding houses refurbished for student accommodation, not all office buildings are suitable for this purpose. Those office buildings with smaller floor plates and more access to light, however, could be adapted for accommodation more along college lines, with rooms, kitchenettes and common study and dining areas. Residential floors of pubs can also be adapted to accommodation for students, much as have many inner-city pubs been converted to backpacker accommodation.

The bottom line

While the cap on international students may have some short-term effects on the student accommodation sector, particularly in certain regions, the long-term outlook remains positive. The underlying mismatch between student-suitable housing and the growing student population is likely to continue to drive demand, providing opportunities for developers, providers, and investors in this dynamic market. The sector will remain resilient.

This, combined with a relatively stable median yield of about 5.5%, makes the asset class an attractive bet for investors.

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