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March 20, 2017

Higher enrollment in tertiary education has led to universities seeking private sector funding for residential facilities to house the next generation of students.

JLL estimates that students in higher education will increase from 165 million in 2011 to 263 million by 2025. The increasing enrollment comes from the growing number of parents from China and India who prefer to send their children to prestigious overseas institutions.

JLL reveals that in the past 18 months, a record €14.4 billion (US$15.5 billion) in new capital has been invested in the student housing sector as universities seek to partner with institutional investors to help transform facilities to cater to rising student intake. At the time of writing, GIC, Singapore’s sovereign wealth fund, announced that its joint venture with Canadian Pension Plan Investment Board and The Scion Group had acquired three U.S. student housing portfolio for about $1.6 billion.

In the UK, the most active market, transactions increased from £2 billion (US$2.5 billion) in 2014 to £5.7 billion in 2015, according to JLL. The United States, the world’s largest student accommodation market, also experienced massive investments in this market. From June 2014 to December 2015, transactions reached US$7.6 billion, of which about US$3.4 billion was sold to institutional investors. The emerging student-housing markets in continental Europe and Australia also experienced sales.

At the end of 2011, the combined value of the Unites States, the UK and European student housing market was estimated to have been more than US$200 billion, according to JLL’s Global Student Housing Report 2012.

Amid growing enrollment, Public Private Partnerships (P3s in the U.S. and PPPs in the UK) have become the financial model of choice for universities to fund construction of new facilities and maintenance or rehabilitation of existing buildings.

“Universities are vulnerable to pressures common in the business world, such as raising capital and intensifying competition,” said David Houck, Managing Director of JLL’s Higher Education practice in the United States.

Many dormitories need a makeover as students now demand more modern accommodation. In contrast to traditional dormitories, new student housing designs are more conducive to successful learning outcomes. “Universities are turning to private sector experts for operational expertise and financial solutions that allow them to focus on their core mission of educating students,” Houck explains.

“In 2017, both public and private universities will recognise that P3s are an effective and strategic way to satisfy long overdue development goals,” Houck said. Under the P3 model, universities have the flexibility to retain control of their facilities. At the same time, they could manage debt and provide a potential revenue stream, Houck adds.

Universities in other countries have also tapped private investments for funding. In the UK, JLL predicts a particular increase in the number of Design, Build, Finance and Operate (DBFO) schemes over the next five years. In these, a student housing partner takes a long lease of university-owned land, designs a scheme in conjunction with the university, raises finance, builds the dormitories, operates the site and takes the risk of finding occupants. In return, the University receives a capital receipt, the expertise of a dedicated partner and continued influence over creating a high-quality student experience,

As many as 25 universities have partnered with private specialists for DBFO schemes, said Robert Kingham, JLL Director of Higher Education in the UK. Under such schemes, specialist developers and managers develop and manage housing facilities under a lease agreement of up to 50 years.

About 43,000 beds or 17 percent of student housing owned by universities have become part of a P3. The biggest transaction involved nearly 5,000 beds at the University of Reading. According to JLL, about £2.4 billion has been invested in these partnerships.

“Universities don’t want to spend their own money on student accommodation,” says Kingham. These institutions want to focus their investment on teaching and research facilities, sports and social centres and all the other areas that will improve their appeal to prospective students, he adds.

Universities have to contend with the rising construction or renovation costs. Many student halls in the US and UK are over 40 years old. In the UK alone, refurbishment costs would reach over £5 billion, according to JLL research. In the U.S., deferred maintenance at both public and private universities has grown to approximately US$100 per square foot.

JLL, however, cautions universities from making quick decisions.

It’s key that academic institutions do not take short cuts, Kingham explains. Appraising the value of a DBFO proposal is a “complex and expensive” process, he says. “Because the contracts are generally for 40 or 50 years, you have to be very clear what each partner is doing. We have seen deals in which universities haven’t been aware of the purchasing power they have.”

It would take several months for the institution to evaluate options. They have to define goals, set performance standards and establish the timetable in clarifying finances. They also need to identify risks and obtain approval of the key stakeholders, advised Kingham.

David Houck
Managing Director of JLL's Higher Education practice, U.S.

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