What’s behind the pandemic resilience of student housing?

Alignvest Student Housing’s Sanjil Shah lays out the factors driving the real estate asset class’s performance

What’s behind the pandemic resilience of student housing?

As travel restrictions, social distancing rules, and other public safety measures took hold early in the pandemic, stakeholders in commercial and residential real estate properties had one burning question: Would COVID’s corrosive impact on demand for shared spaces translate into lower returns – or possibly even losses – within their portfolios?

Sanjil Shah, managing partner at Alignvest Student Housing REIT, couldn’t answer that question immediately last March. He had to wait until April 1, 2020, a few weeks after COVID-19 was officially recognized for the threat that it is, before he could provide investors in the student housing-focused REIT some semblance of clarity.

“When we were able to collect the vast majority of our expected rent on April 1, we were able to breathe a sigh of relief,” Shah told Wealth Professional. “As we got into May, June, and July, we confirmed that students were staying, and rent collection was up compared to other real estate asset classes that had been just decimated.”

When the pandemic first started, he said there was some disruption as universities and colleges across Canada sent students home. But over time, students at their properties came back to the point that occupancy remained very close to 90% across all of the REIT’s privately managed properties. The primary driver of that behaviour, Shah said, was their desire to maintain the university-related social experience.

Through the lens of rent collection, the portfolio also looks strong. The REIT collected 98% of its monthly rent through the pandemic, he said, thanks in no small part to the parental guarantees and other forms of protection structured into the leasing agreements they’ve made.

“Parents weren’t interested in defaulting on a monthly rent of $800 to $1,000 per month, because it would’ve put a black mark on their child’s credit records,” Shah said. “And they had already factored rent costs into their decision to send their child to university, so keeping up the payments wasn’t a major challenge.”

As the COVID pandemic forced schools to adopt virtual learning programs, Alignvest proactively upgraded its buildings with fibre-based internet connections; Shah expects a long-term payoff from that investment, given that internet reliability is the number two factor driving students’ choices on where to live (with the number one factor being location). To maintain health and safety, sanitation and cleaning measures have been ramped up, as well as security in some areas to prevent outside visitors and guests.

“Since we launched over three years ago in June 2018, we’ve built up a portfolio of properties valued at approximately $670 million,” Shah said. “That’s 11 properties with approximately 4,700 beds across five university markets.”

Part of that portfolio are three acquisitions made just this year. Two properties in Waterloo, he said, have 795 private-occupancy bedrooms and en-suite bathrooms in every bedroom, a highly desirable configuration given the current focus on health and hygiene. Another property acquired at the end of July, close to the University of Ottawa, added another 507 beds to Alignvest’s total residential capacity.

Against the backdrop of a still-not-final economic recovery, snapping up new properties is a bold decision. But as Shah sees it, the need for high-quality student housing is certain to increase, as on-campus dormitories undergo a de-densification process; the current consciousness surrounding social distancing, he said, means that many university bedrooms can now accommodate less than they could before.

Students also have slimmer pickings for off-campus residence choices. “Other than professional purpose-built student accommodation, it's kind of a grab bag,” he said. “You might have a converted house that'll have 12 kids living in one house and sharing two bathrooms. Or you might have to live two or three kilometres away from campus and take public transportation with 30 or 40 other people in a bus every morning.”

While Alignvest has a fairly robust pipeline of high-quality acquisition opportunities, Shah said it also wants to stay disciplined in order to emerge from the pandemic strong. Over the next couple of quarters, the REIT will focus on optimizing its existing portfolio and ensuring its three newest properties are properly integrated. The expectation, he said, is to ultimately become a cross-Canada student housing owner-operator, which means continued expansion into new markets heading into 2022 and 2023.

From a returns standpoint, the REIT has been able to deliver an annualized return of nearly 10.5% to investors over its three-year history, which includes both capital appreciation of properties and monthly distributions. During the pandemic, it has continued distributions with an effective yield of 5.3%; over that same period, the valuation of the portfolio has been relatively flat.

But as properties return to pre-pandemic occupancy levels, and universities and colleges once again open their doors, the outlook is for robust growth in the portfolio’s valuation and distributions starting in Q3 and continuing into Q4 and 2022, which would get Alignvest closer to its target IRR of net 15% to investors.

“One point that we’ve heard from wealth managers recently is how we’re now in an inflationary period, and how real estate is a natural hedge against inflation,” Shah said. “But I think some subsectors within real estate, like the hotel and hospitality asset class, are still a ways away from returning to pre-pandemic stability.”

Student housing, he argued, is able to provide superior inflation protection. Since annual turnover of occupants at Alignvest’s buildings is close to 50% (students graduate and move on), the REIT is able to adjust rents commensurate with increases in costs. On the other hand, lease periods in office, industrial, and retail spaces are on the order of five or 10 years, while multi-family residential properties experience substantially lower turnover rates than student housing, meaning that rent in those subsectors are stickier and it decreases the ability to reset rents to market levels.

“I think we’ve arrived at this unique situation where wealth professionals, portfolio managers, advisors, and even family offices and high-net-worth investors are seeing this as a unique way to hedge and protect against inflation,” Shah said.