Over the past 15 years, the student housing market has become more sophisticated. Moving away from purely on-campus facilities to self-contained, purpose-built accommodation options with quality management. Lessons learned overseas have seen many players enter the Australian market capitalizing on the growing number of international students coming to Australia to take advantage of the quality education available.
As a result, we have seen the emergence of student accommodation as a commercial investment asset with a range of buyers looking to take advantage of the high occupancy and stable returns the asset class had to offer. We have seen a range of ownership structures of these assets with some asset owners operated, others sold to local and offshore investors with onsite managers while others have been sold to individual strata owners with an appointed manager.
The pandemic period has been a difficult time for this asset class given the remarkable decline in the number of international students coming to Australia. Even so, that hasn’t stopped the historic $2.1 billion sale of the Urbanest portfolio from taking hold in 2020 amid the COVID-19 pandemic locking down our borders. The investment in these 14 assets across the country was made by experienced offshore operator Scape in a joint venture with AXA and Alliance following the purchase of the Atira portfolio in 2019, making Scape the largest owner of student accommodation in Australia. Continuing its efforts and commitment to the asset class, Scape purchased UTS assets this year, while GIC made partial investments in a range of assets underscoring the international commitment to the student housing sector.
Student housing assets have shown a wide range of investment returns over the past decade, often showing a significant deviation from traditional commercial investments, with average pre-pandemic returns ranging between 6% and 8.5% . Given the reduction in interest rates, we’ve seen a big drop in yields over the past two years, with the ranges narrowing closer to 5-6%, but as interest rates rise and arrivals of international students are slow to recover, the future of student housing is uncertain.
The latest results from the Ministry of Education highlight that international student arrivals are more than 60% below pre-COVID-19 levels for some cities. The attraction of international students has declined somewhat, particularly from markets like China where there has been an 84% decrease in student arrivals. India is now the largest contributor to the number of international students in Australia, accounting for 16.52% of all arrivals, down 61.62% from June 2019 results. The ability to learn remotely has been a major impediment to attracting students as well as political pressures leading to a significant drop in international demand which constitutes the bulk of tenants in student accommodation. This is supported by the large number of student visa holders who are not currently in Australia, currently 19% of visa holders are not currently in the country, again China is the main contributor with 37% of recipients of visas. at home, followed by Columbia at 27%.
However, given the low vacancy rate in the wider residential market and the steep rise in rents, especially in major cities, we are likely to see more domestic students turning to these specialist accommodation options with their inclusive structures which often include expenses such as internet and electricity. . Going forward, until there is a greater recovery in the international student market, occupancy levels may come under pressure, as well as rising interest rates, causing a return yields towards pre-COVID-19 levels. This is expected to further hamper the completion of nearly 5,000 new student housing units in the development pipeline across the country.