How foreign students impact the Australian property market

I’ve been talking about interest rates over the past few months and the likelihood of them coming down over the next six months. There’s no doubt the economy is being squeezed and rates have risen too high. No change to my interest rate views this month. If you missed my previous note, it’s here.

Instead, my focus this month has been on the fundamentals of supply and demand. Building approval numbers are like waves in the ocean, they go up and down. But they don’t really mean much until we see approvals actually progressing to commencements. I’m still not seeing new supply hitting the market as much as it should be.

Interest rates are a demand driver. But there are other things going on such as migration trends and, in particular, an area that I’m becoming more interested in — student accommodation.

Australia doesn’t export many things anymore. We barely manufacture anything. We leave that to China and our Asian neighbours. Instead, we export services, and one of the most lucrative is education. Our universities have, on balance, a good reputation globally and provide an alternative to the ultra expensive UK and USA institutions.

Universities, like handbags, are luxury products. Australia is also a beautiful and safe place to live. And cheaper.

Education is seen as a gateway into Australian migration. Many affluent families send their children here to study, with the hope of becoming permanent residents and eventually joining them as dual residents. A back-up strategy if things don’t go according to plan in their home country.

What surprised me to learn this week is that purpose built student accommodation (PBSA) in Australia accounts for only 5-6% of total student numbers here. To put it simpler, of the approximately 1 million foreign students in Australia, only around 50-60k as living in PBSA. The rest find private rentals in the property market.

According to research from MaxCap, even if the government does pull back foreign student numbers (for political purposes), the reduction is unlikely to address the huge shortage in demand for student housing and the under supply of PBSA.

What does this mean for ordinary investors

Students prefer to live close to campus in well-connected areas. They’re young and want to experience life. They’ll sacrifice space for amenity. This means that demand for rental property over the next 10-20 years is still likely to be strong, supported by foreign students in Australian major metro cities.

Even if the big student accommodation towers keep being built, they’ll need to double or triple in volume to achieve similar penetration ratios to the UK or USA student markets. Around 45% of students live in purpose built housing in the UK, in the US the number is around 29%. Remember, we’re at around 5-6% and we all know how hard and expensive it is to get things built in Australia at the moment.

Student accommodation currently on offer isn’t exactly compelling, either. A quick Google Search will show you the “average” living experience. I won’t name companies or names, but you can check for yourself.

Rental demand to remain very strong

If you’re a tenant, it means you will have to continue competing with students in popular metro cities, close to campus and amenity. You will find better value in areas which students don’t want to live near — outer suburbs.

If you’re a landlord or potential investor, focus on the right areas. Sydney, Melbourne and Canberra have excellent universities. Amenity is key. Demand for property and rental growth is likely to be strong for many years to come until PBSA starts to eventually take market share away. In my view, it won’t be for at least 10-15 years.

Again, due to politics, the government is looking to slash foreign enrolments by around 7-10% in some areas. But that still is very small in the overall student demand picture.

Universities will push back, and we’ll see the enrolment caps eased post election. Around 140k people are employed by universities, making it a large interest group. So the government will need to be careful in balancing rental market concerns with university employment concerns.

Bottom line: Students are going to continue spilling over into the private rental market for many, many years. This adds further support for housing demand in Australia and makes metro properties, particularly apartments and townhouses, attractive long term investments.

Peter Esho is an economist and Founder of Esho Capital. He has 20 years of experience in investments and markets.