This week’s CPI announcement, at 3.6% YoY (ABS), reinforced to markets that there is still work to be done before any likely RBA rate relief. Given the well-publicised tight vacancy in the housing market, elevated rents (7.5% YoY) continue to be an area of focus. Private capital (debt and equity) has been largely inelastic in responding to one part of this housing supply-demand dislocation, Purpose-Built Student Accommodation (PBSA).
- We have been speaking to developers in the PBSA sector; their feedback on the incoming changes to international student immigration intake and effects on the existing and newly built apartments suggests:
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- existing PBSA will be changed from co-living (mixed tenant accommodation) to student accommodation only, and
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- universities will play a big role in the offtake and location of assets – this should create opportunities for developers to collaborate directly with them on design, location and presales.
- PBSA is a residential real estate subsector designed to meet the needs of students. It typically offers fully furnished units, with utilities and amenities such as study areas and social spaces often located near universities.
- The appeal of PBSA to developers lies in higher rental yields, with rents for two-bedroom PBSA properties commanding a 15% premium over similar units in the same area (CBRE) and historically high occupancy rates driven by demand from international students. PBSA properties tend to consist of 100 to 500 units and project costs range from $20 to $80 million.
- The demand dynamics of PBSA are complex. International education is Australia’s fourth-largest GDP contributor (ABS), with current international student enrolments topping 741,224 as of March 2024 (Department of Education). However, there is material uncertainty regarding the current Federal government policy’s impact on future demand.
- Developers need more appropriate development sites and less prohibitive construction costs, which is challenging the delivery of PBSA supply. Building cost escalation is expected to be 4-5.5% for most cities in 2024 and 7.5% for Brisbane (WT Partnership).
- These uncertainties on both the demand and supply sides have resulted in us seeing fewer PBSA projects today than three years ago. During 2020 and 2021, we reviewed over $200m in PBSA developments, but only a single $50m senior secured opportunity in the last two years. We expect this capital inertia to remain until there is higher certainty on both sides of the economic equation, which will likely not come before the 2025 Federal election, given possible policy changes that would impact international student visa numbers.
While we expect the supply-demand imbalance in PBSA to persist in the short term, we continue to see broader opportunities in residential apartment projects. Consequently, we have increased our exposure by 2% to 11% in the Merricks Capital Partners Fund over the past months and expect this to increase a further 5-10% in 2024.
Source: JLL Research
