Why investors are betting big on student hostels

Real estate developers are increasingly banking on the growing student population to offer accommodation facilities with lucrative returns.

The market for student housing, also called purpose-built student accommodation, is seen as a good alternative for investors who have burnt their fingers in other investments such as malls and mixed-use houses.

Investors and financiers are now giving this niche more attention given that student housing is delivering relatively high returns and consistent rental income in comparison to other asset classes, where returns tend to fluctuate depending on real estate cycles.

The growing bet on students’ hostels comes on the back of mid-level colleges and universities posting increased enrolment that has stretched internal accommodation, forcing students to look elsewhere for accommodation.

Official data shows the student population in post-secondary education institutions including universities and vocational centres crossed the one million mark in 2020 - a 31 per cent growth in five years. 

But with institutions such as public universities running on thin budgets after the government cut budgetary support, expanding accommodation is no longer part of their priorities. This has given impetus to private investors to venture into the sub-sector.

Property developers such as Acorn have been keeping an eye on these changes and responding through student hostels that rise above challenges such as poor security, overcrowding and inadequate sanitation.

Acorn’s latest involvement is the announcement that it wants to invest Sh3.6 billion in building three hostels that will accommodate 4,842 students.

“The demand for hostels is rising in Africa, and this is driven by the significant wave of young people finishing high school,” said Acorn Holdings Chief Executive Edward Kiraithe last year.

“We have a construction pipeline of about 7,000 beds going on around Nairobi. This, in particular, is one of the largest purpose-built student residence portfolios in sub-Saharan Africa,” said Kiraithe last year. “When you look over the next 10 years, what most people don’t see is that we have 12 million school going students who are going to be getting into tertiary education. These young people will be looking for accommodation.” The planned projects, announced last December, will be run by the Acorn D-Reit— the unit which specialises in developing the hostels’ brands Qwetu and Qejani.

Despite Covid-19 disruption leading to virtual learning, Acorn D-Reit says the preference of students for a place away from home and with facilities such as stable electricity, gym and Wi-Fi cannot fade away.

“Students prefer to study at their own accommodation instead of staying at their parents’ home since the family home is not an ideal learning environment due to distractions,” says Acorn Student Accommodation I-Reit in its latest report.

“Students and young adults are social beings who want to experience university life, which includes staying away from parental supervision.”

Acorn will for instance through Magnolia Creek Properties LLP develop 924 units of Qejani and Qwetu model residences at Northlands City targeting up to 2,348 students mostly drawn from Kenyatta University.

The development will also include other facilities such as a minimart and cafeteria, launderette, salon, study rooms and movie area.

The ever-increasing university colleges, with many located in mid-level towns where accommodation is not sufficient, has created a housing gap that investors are waiting to cash into.

The young generation, which makes up the student population, is also demanding modern facilities and furnishings which mass-market houses do not offer.  With such a shortage, the concept of long-term leasing of land near universities under the build, operate and transfer model has is increasingly becoming fashionable.

Banks and other financiers are reporting an increased appetite for real estate funding to students’ hostels being set up, either by individuals or institutional investors.

Head of mortgage finance at Cooperative Bank of Kenya Chris Chege said the lender has seen an increased appetite for real estate loans from investors targeting student accommodation in towns like Meru, Bondo, Laikipia, Kakamega, Nandi and Nyeri.

“We can confirm intermittent requests to purchase land near universities. We have financed several clients across the country and continue to witness many enquiries,” said Chege.

“We observe that most of the individual developers tend to build incrementally, mostly buying land to build hostels later or use the land to offer services such as mini-markets, bookshops and clinics which are relevant to the student accommodation.”

The institutional investors are mainly focused within Nairobi in line with the realities that the capital is home to most colleges and universities and with learners demanding better accommodation.

Many institutional investors have managed to use various financing options such as attracting foreign direct investments, issuance of bonds and public listing through REITs.

Public-private partnerships between universities and private companies to facilitate the construction of purpose-built student accommodation is also on the rise.

Another property developer, Student Factory Africa, in April last year broke ground for the Sh5 billion residence in Karen Nairobi.

The firm partnered with the Kenya Conference of Catholic Bishops to launch the 4,500-bed student hostels that will mainly serve students enrolled at the Catholic University.

Student Factory Africa, which first announced its entry into the Kenyan market in March last year, has partnered with a Dutch-based private equity company to deliver the project which will consist of 10 five-storey buildings.

Accommodation for students has proved to be a good hedge against economic headwinds with global data showing enrolment continues to grow even in times of economic downturns and the usual real estate cycles.

The enrolment tends to spike during economic downturns as more people seek to diversify their skillsets, according to Cytonn Real Estate, which said in 2020 research that it expects investors to sustain interest in student accommodation.

“We expect that the government’s policy to have a university in every county, as well as plans to increase international students to 30,000, will sustain the high student accommodation demand, creating an opportunity for investors to meet the demand for well-located, high-quality and affordable accommodation,” said Cytonn. According to the 2019 census data, the number of Kenyans aged between 15 and 24 years stood at 9.73 million or 20.5 per cent of the total population.

This offers a rich pool that could sustain the market for student accommodation.

Other investors in this space include Questworks who are building 200 units dubbed Parallelfour in Madaraka and the Kenya Defence Forces Old Comrades Association who are putting up 500 units called Studyville in the same estate.

Century Developments and Kuramo Capital also signed a partnership deal to build 10,000 student accommodation units in Kenya within five years. In August last year, Acorn netted Sh79.36 million from students’ accommodation.