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Student accommodation: Is it a rip off?

Demand outstrips supply.
South Point's inner city student accommodation offers good value. Picture: Moneyweb

It’s the time of the year when South Africa’s one million university students head to campus to register for their studies. For roughly 300 000 of them, it will be their first year of study. And by now, they will have discovered that finding affordable accommodation near to their university is almost as difficult as being accepted in the first place.

South Africa’s student accommodation shortfall is acute. If one includes students studying at other tertiary institutions, the shortfall is anywhere between 300 000 and 500 000 beds. This will grow, and possibly double, once government’s free student-funding model kicks in.

Universities’ residence facilities to accommodate out-of-town students are woefully inadequate. Stellenbosch University has 31 000 students, but 6 500 residence beds. The University of Johannesburg has 50 000 students but 19 000 beds spread between residences and accredited private accommodation. It is a similar story at other city universities.

This has created an obvious gap for private sector property developers who are working hard to make up the shortfall.

The big players include private operators like South Point with 8 000 beds across the country, Campus Key with 4 000 beds and the soon-to-be-listed Inkunzi Student Accommodation Fund, which has 6 500 beds across its portfolio. Of the listed companies, Octodec is invested in inner city student accommodation and Redefine owns 51% of Respublica, which manages more than 6 000 student beds across the country.

Room rentals and standards vary widely, depending on the developer and the city concerned. At the top end are Campus Key and Student Life whose student accommodation in Cape Town and Stellenbosch costs about R9 000/month, depending on the room configuration. Respublica’s mix of accommodation varies from R3 000 to R6 000 a month, while South Point and Inkunzi charge R3 500/month for a room.

A standard residence room offered by Wits University and UCT costs between R4 300/month and R5 300/month, respectively, without meals.

“The National Student Financial Aid Scheme (Nsfas) will pay R3 000/month for student accommodation in the big centres,” says Owen Nkomo, whose firm Inkunzi Wealth plans to list the Inkunzi Student Accommodation Fund (ISAF) soon. “It is a big challenge to provide a service at that price. We are not talking about a student digs, but a structured facility that provides students with a similar experience to university residence – with the safety and convenience factor added in.”

Parents may feel that they are being charged an arm and a leg, says Paul Duncan, portfolio manager at Catalyst Fund Managers, but the reality is that managing quality student accommodation is not for the faint hearted. “Yes, rentals are significant, but the risks are high. These properties require more ongoing maintenance than your average property. You need a strong admin platform and bigger than average property management team because managing so many tenants, collecting their rentals and managing complaints requires organisational capacity.”

The sector has also been politicised by the Fees Must Fall movement. “Accommodation must be accredited by the university and 25% to 30% of your students need to be Nsfas students. The challenge is that this funding often doesn’t come through until about April,” says Marc Wainer, executive chairman of Redefine.

Investors in this sector argue that returns are not extraordinarily high. “We develop, own and manage our own properties, which offer ‘hotel’-like accommodation to the top end of the market,” says Campus Key CEO, Leon Howell. “We find it very difficult to develop at a yield of 10.5% or better. “The first cost is land, which is very expensive – particularly in Stellenbosch and Cape Town where land is scarce. Building these units is expensive – we don’t share rooms and we don’t share bathrooms. And once the building is complete, the management of a student complex is difficult. The industry has changed – now it’s about providing the environment in which students can study and pass, and socially with each other and with the university.”

“The market can be lucrative if your occupancy is high. We can get a return of 10% to 11%, but there is a lot of competition,” says Weiner. “There is also no doubt that students are being ripped off. The demand is such that you have fly-by-night operators providing sub-standard accommodation at inflated prices. At the other end, some would argue that accommodation in towns like Stellenbosch, is a rip off.”

But parents must consider the value they are getting. “How much security is there? What services are included? How much data do students get? How far is the building from the university? All of these items cost money. You pay for what you get,” says Nkomo.

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“These properties require more ongoing maintenance than your average property.” This says it all. Once the students move out one can expect major expenses to return the property to rentable condition. This either discourages the property owner to rent to students (and other young people) or forces him to charge more. I am not saying that all students are bad tenants but on average they cause far more damage than older people.

It it was such a ripoff (whatever that may mean in a free market) then the yields would be too high for the risk incurred renting to students. Money would be pouring into close-to-campus accommodation, bidding property prices up and the yields would fall in line with what they should be.

Since this is not happening we can conclude the returns are commensurate with the risk in the context of the supply and demand fundamentals.

It’s a free market chap and if you don’t smaak it you can kraak it!

I admire the bravery of property owners who are prepared to risk their facilities for a mere 10% yield!

End of comments.

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