[+] Carrot, Stick: Budget Leaves Student Living Sector Reeling

International education is worth an estimated $47.8 billion to the Australian economy, so there were many delighted to hear student accommodation suddenly appear front and centre in Treasurer Jim Chalmers’ third Budget speech last week. “Australia’s international education sector is a national asset,” Chalmers said. That was the carrot but then came the stick. Or several sticks. After decades of growth—National Australia Bank estimates in 2023 more than half of Australia’s GDP growth came from spending by international students—universities will now be forced to cap numbers of overseas enrolments. And, Chalmers said, number of international students that universities can enrol will be tied to their ability to build suitable accommodation. “If universities want to take more international students, they must build more student accommodation,” the treasurer said. “We will limit how many international students can be enrolled by each university based on a formula, including how much housing they build.” It’s those carrots that have left the sector wondering to which part of the Government it should listen—that part promising to halve net overseas migration from a record 528,000 last year to 260,000 next. Or the part that understands international education is the country’s fourth biggest goods and services export-earner, behind natural gas but ahead of gold. The Property Council of Australia (PCA) is the first to admit the shortage of beds for students in the country is critical. Their numbers say so. ▲ Scape ’ s student digs at Carlton, one of 36 buildings it has across four Australian cities. Australia’s purpose-built student accommodation (PBSA) providers own and manage more than 76,500 beds across the country and, in a report released in April, the PCA’s Student Accommodation Council says another 7770 beds are projected to come online by 2026. That’s not nearly enough to alleviate demand in the private rental market. In fact, Student Accommodation Council executive director Torie Brown says Melbourne—the unofficial national PBSA capital—has about 27,000 student beds, which is still a ratio of one bed for every 17 students. Sydney has about 17,000 beds. “And it should be noted that these are both cities with rental vacancy rates sitting below 1 per cent,” Brown told The Urban Developer . “So yes, on one hand, we were really pleased to see PBSA as an asset class recognised in the Federal Budget,” she said. “What caught us a bit by surprise was the linking of student accommodation to student visas … that wasn’t something we were expecting.” CBRE, the global commercial real estate services and investment giant, says that link means a risk to the education institutions themselves. “Like it or not, [they] have become heavily reliant on international students as a key source of revenue,” CBRE director of valuation and advisory services Rosie Young says. ▲ The Federal Government says the number of international students that universities can enrol will be tied to their ability to build suitable accommodation. “To reduce this revenue through enforced caps risks damaging the overall education provision and could lead to reputational damage both for individual institutions and the wider Australian education system.” Young, whose role takes in PBSA, says partnering with the private sector may be the only solution for the institutions. “Otherwise, it is difficult to see how universities will be able to provide the required level of accommodation in the short period of time needed,” she says. And that’s what the PCA and the providers it represents will continue to lobby for—partnerships between the universities and the private sector. The PCA has seen the draft framework of the Government’s new policy and will now begin a consultation process. Brown wants to see universities work with the private sector to fill existing buildings first because, she says, “that’s a way of instantly providing accommodation for students … there is some flex in the market to do that”. “And then we want to work with the sector to look at building out the pipeline because we know that the pipeline, as it currently stands, is not enough. ▲ The PCA’s Torie Brown, Scape’s Anouk Darling and Local’s Matt Berg. “But if the requirement is that student caps are linked only to the development of new stock, then there’s going to be a couple of years before universities are able to go above and beyond their international student caps, because it takes years to get new projects out of the ground.” The idea of the private sector partnering with universities to provide student accommodation is not a new one. In July last year the University of NSW and student accommodation powerhouse Iglu announced they had lodged joint plans for a huge student village in Sydney’s eastern suburbs. At almost 1ha, the university-owned chunk of land across the road from its Kensington campus would house 1066 student apartments in five buildings, some of them up to 23 storeys. The filing came after Iglu—which owns student accommodation buildings in Sydney, Melbourne and Brisbane—signed a partnership deal to lease the university’s 9280sq m western carpark for 99 years. The precinct will cost an estimated $243 million. But all that assumes a university has nearby land to contribute. “The universities that are most at risk under this policy are the universities that do not have the capacity to build new student accommodation,” Brown says. International student visa applications ▲ Source: Savills “There’s simply no capacity for some universities to be building and, at the same time, a reduction in international student numbers will affect the university’s bottom line. None of which builds confidence for universities to then undertake a capital building project. “The fastest way for universities to add PBSA stock,” Brown says, “is to partner with the private sector.” With 17,000 beds in 36 buildings across four Australian cities, and another eight buildings in planning and development, Scape is the country’s biggest owner and operator of student accommodation. Chief executive Anouk Darling is calling for all levels of government to be aligned. “The difficulties faced by the sector include slow planning systems, high property taxes and clunky state-based legislation,” she says. “For instance, Victoria grants exemptions to build-to-rent projects while imposing taxes on PBSA that discourage investment.” Like the rest of the sector, Darling wants to see student accommodation treated in the same way as the burgeoning build-to-rent sector. Late in April—and 12 months after it was first mooted—the Federal Government released draft legislation to implement two key income tax incentives for build-to-rent projects. ▲ CBRE director of valuation and advisory services Rosie Young: Universities are heavily reliant on international students as a key source of revenue. The 15 per cent withholding tax for foreign investors in a Managed Investment Trust (MIT) will be extended; and an accelerated depreciation for new BTR projects from 2.5 per cent to 4 per cent each year will apply, as long as construction began after May last year. Meanwhile in Victoria, on top of annual land tax rates, foreign PBSA owners were being charged an additional absentee owner surcharge of 2 per cent for properties valued at more than $250,000. That has now risen to 4 per cent. At least four Australian states levy foreign owner surcharges on PBSA. “Inconsistencies at the state level create uncertainty for investors,” Darling says. CBRE’s Young agrees, saying investors want to see more consistency at a state and federal level. “If governments want more investment in housing infrastructure, all levels of government need to be on board,” Young says. “High statutory charges, high foreign ownership levies, and slow and restrictive planning regimes do not assist the private sector in playing their part in helping resolve the housing undersupply issue that we currently face.” Matt Berg is founder and co-chief executive of Local, the build-to-rent provider, but earlier in his career spent time in the student accommodation sector. ▲ Australia is home to international students from more than 100 countries. About 27 per cent come from China. There are many crossovers between the two sectors, he says, not the least of which is that both count foreign capital as their major investors. “There are sovereign wealth funds and pension funds that invest into both asset classes, or are considering investing into both asset classes,” Berg says. “And unfortunately, this does create a little bit of an element of uncertainty around the current thinking of the Government in their drive for more housing. “There are some things being said that give general comfort and then there are some actions being taken that confuse the sector and probably concern the capital. “And we’re getting that real-time feedback.” Australia is the fourth biggest student market in the world, according to the PCA’s Student Accommodation Council, behind the US, UK and Canada. “Investors are location agnostic,” Brown says. “They’re looking at a map of the world and deciding where they’re going to place their capital into PBSA, because the investment class is very attractive right now. “But they’re looking at all the migration flows, all of the visa policies. And what this has done, has made investors wary because we don’t know how many in that figure of 260,000 migrants will be just for student visas.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

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