Top tips for thriving in South Africa’s student accommodation sector as a property entrepreneur

While there is a strong need for more decent, affordable accommodation near South Africa’s higher education institutions, from universities to TVET colleges, property entrepreneurs keen to take advantage of this opportunity will need to strike a careful balance if they are to succeed.

“The financial considerations for a student accommodation project are very similar to those of any other affordable housing development,” says Siya Jele, portfolio manager at TUHF.

“However, understanding all the ancillary costs involved in providing housing for students that meets all the criteria outlined by universities and preferred by students is crucial, as these can be quite different,” Jele said.

TUHF Limited,  a commercial property financier, says that utilities and Wi-Fi, for example, must be built into the rate per bed. It said landlords cannot recover these costs from students individually, as they normally would with typical tenants.

Depending on where the facility is located, the distance from the facility to campus, landlords may also be required to provide transport services to and from campus.

“You can’t just charge a bus fare,” Jele explains. “The cost of the shuttle and running the service must be included in your rate per bed.”

Students were said to be fickle with high expectations. “Students prefer not to have to share facilities like bathrooms or kitchens en masse, so the old dormitory-style approach doesn’t work in this space anymore,” Jele says.

“Properties must be designed with private bathrooms and kitchenettes included in each unit. These units can be shared by a limited number of students. Wi-Fi, too, is a deal-breaker for students – if it’s unreliable or slow, they will move, the word will spread, and you’ll find it difficult to fill your units next year.” 

“A multi-residential block of flats, for example, can command a cost-to-income ratio of around 30-35%, while for student accommodation it's closer to 50% if you’re running a decent facility,” Jele says.

“So being mindful of these unique costs is very important for a successful business in student housing.”

Student housing provision is actually closer to hospitality than normal residential accommodation. 

Even so, the profit margins on student accommodation are good, as long as entrepreneurs provide the right product – one that meets the demands of students and universities.

“It’s just a matter of balancing the increase you’re getting in terms of rental income against the commensurate increase in your operating costs,” Jele explains. “You have to put a lot more into it to get a lot more out.”

Sharing key examples of how TUHF clients manage their operating costs effectively, Jele said they have seen clients achieve good results by implementing Building Management Technology geared towards sustainable energy and water use to minimise utility costs.

He said placing motion-sensing light fittings in common areas to turn lights on and off-depending on whether students are using the space or not, can significantly decrease energy costs.

“One client has even linked the lights and plugs in each unit to students’ building access cards, so that they work much like a hotel key card. When students enter their rooms, they slot their card into a slot on the wall that activates the lights and plugs.

"When they leave, they take the card with them - turning everything off except the fridge.”

Other examples include using heat pumps instead of traditional geysers and low-flow water fittings.

“Well-managed, well-appointed student accommodation facilities can give a higher return than standard affordable rental housing businesses, but the risks are also higher,” Jele says.

One such risk lies in cash flow management, as student accommodation providers can only expect rent payments for 10 months of the year and are often heavily dependent on NSFAS for payment.

TUHF said NSFAS’s poor handling of private student accommodation payments has also been making headlines a lot. It said late payments from NSFAS directly, or from universities that channel NSFAS payments to accommodation providers, can put property entrepreneurs in a very challenging position in terms of meeting their loan obligations.

“NSFAS is such a massive lever. It poses the biggest risk to successful student accommodation projects at the moment,” Jele says.

“People can go for months without receiving payment, all the while having to maintain the standard of facilities they provide, with the result that a disproportionate volume of TUHF’s impaired loans are for student accommodation projects. Following on from this, as a responsible lender, it becomes increasingly more difficult to lend to new entrants due to the associated payment risk.” 

That being said, TUHF said NSFAS could also drive the opportunities in student accommodation. “The focus from investors has been on developing student accommodation facilities close to traditional universities,” Jele explains.

“But eventually this market will become saturated. At the same time, there is very little focus on providing decent accommodation for students at TVET colleges.

"These institutions face the same dire shortages. If NSFAS resolved its funding mechanism challenges and drove funding towards supporting students in vocational training as well, there is huge potential in this largely untapped market.”

For TUHF, the challenge lies in balancing the opportunity to drive meaningful impact against the substantial risks involved. First among these risks is NSFAS’s ability to execute on its mandate. The second is the universities’ ability to administer student housing.

Whilst some are very good at it, others are less so. Yet savvy property entrepreneurs can do well in providing this much-needed service.

According to the market assessment, "The Student Housing Landscape in South Africa", published by the International Finance Corporation (IFC), South Africa’s Department of Higher Education and Training estimates that the average cost to build a student bed in South Africa was R 225 000, resulting in a R115 billion funding gap in 2020.

The funding gap was expected to grow to an estimated R 176 billion by 2025. IFC said raising the funding required to address this massive shortage requires broad support from the private sector and made cooperation and partnerships more important than ever.

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