German Operators GSA & Amro REP Discuss PBSA, Coliving, and Multifamily: “Massive supply-demand imbalance provides many opportunities”

The DACH region of Europe (Germany, Austria, Switzerland) is witnessing significant student population increases and unique opportunities in the PBSA, coliving, and multifamily arenas. A SHURE Europe Emerging Markets session on 10 October with executives from Amro Real Estate Partners Limited, Global Student Accommodation (GSA), and Varsity Campus discussed this growing region while attempting to draw a line between the PBSA and coliving products.

"Student numbers have risen by two to three million full-time students in the last ten years," according to Rainer Nonnengässer, Senior Managing Director of Amro Real Estate Partners. "Secondly, the coverage ratio of students to beds still fluctuates around 10%, which is extremely low, especially compared to the U.K."

Amro Real Estate Partners Limited is an integrated developer-investor-operator in the PPSA sector with an angle into BTR in the U.K. It started its journey into continental Europe five years ago in Spain and is currently operational in Iberia (Portugal and Spain) with some 3,000 beds. Earlier this year, Amro started its expansion into Germany and the Netherlands, where it is currently building up a team and pipeline for execution later this year and at the beginning of 2024.

Germany boasts the largest economy in Europe, while the cost of living for young people is lower due to the absence of tuition fees. In addition, the German environment is more favorable for investors and developers due to lower interest rates when compared to other G7 countries.

"Germany is currently in an interest rate rising environment where there's still cheap debt available - green interest rates below 2 percent makes it highly attractive," noted Nonnengässer. "The economic side of the underwriting makes sense for us to focus on the sector in Germany."  

Global Student Accommodation (GSA) is a worldwide company focusing only on students. With approximately six billion U.S. dollars in management, GSA's investment management division has a property manager dedicated to students called Yugo and a debt fund dedicated to PBSA financing and PBSA development financing. GSA operates in Australia, China, Japan, Dubai, Germany, Spain, the U.K., Ireland, and the U.S.

Indeed, Xavier Scheibli, Portfolio Director of GSA, noted many positive aspects of working in Germany due to its position as the largest economy in Europe. "If you want to invest in Europe and PBSA, you have to be there; you have many students in Germany, not only in the big five to seven cities but also in what I would call secondary cities."

The investment universe in Germany, Scheibli noted, is quite large, including 25 cities with more than 40,000 students. In Berlin, there are currently 200,000 students. "The provision rate in the cities is very, very low."  

Munich boasts "one of the strongest" university systems in Germany due to the growth of the A.I. arena, according to Scheibli. The cost of education in Germany is relatively low for students. Indeed, the highest cost to students is their living arrangement. The German investment arena is very regional, with few developers who are currently active. Building relationships and finding partners on the local level will make a big difference for developers.  

However, there are significant challenges to working in Germany. "There is a need for opportunistic capital that is with you to be able to do development in Germany," Scheibli explained that regulation can be challenging.

Scheibli used the term Stone Age to describe German regulation. In addition, developers often embark on a significant process regarding the complexity of building permits, which in Germany are amongst the highest obstacles in Europe and can be capital-intensive. "If you want to build a building, that is, let's say, cost of 40Million, 50Million, you need to put four million almost, or three-to-four million aside just to get to your building permits, and you never know if you will have the right thing," according to Scheibli.

Germany is a federal system comprising 16 states, so there is no London or Paris equivalent, according to Nonnengässer of Amro REP. There are a large number of traditional university cities and secondary cities that are highly attractive to young people who are pursuing higher education. "You have in all the small cities like you have in Berlin, a real lack of supply for students," according to Nonnengässer.

Germany is a complicated operating environment, requiring good people on the ground, according to Nonnengässer. "It's a pro if you have people on the ground when dealing with a national to local mindset in a way, counterparts when it comes to transactions, dealing with the municipality in foreign languages is still a barrier."

While both Scheibli and Nonnengässer touted the benefits of the framework of the E.U. at a homogenous level, there are significant local aspects in the various countries to consider.

Scheibli of GSA said insurance companies were active buyers in the negative interest rate environment before COVID-19. However, now "capital is available, but it's a bit more opportunistic."

There are no issues with finding money on the financing side, according to Scheibli, but equity is currently a bit difficult." According to Scheibli, equity investors are very interested in PBSA because there is a big difference between the supply and demand side, and delivering new product will be challenging for the next two to three years. 

"Talking to international investors on a larger scale, I think it's fair to say that PBSA and European PBSA are pretty high on shopping lists amongst the top five, and I'm sure that from next year onward, the execution appetite will be way higher than it is currently because a lot are now sitting on their hands or in principle, said Nonnengässer of Amro REP. "However, I don't expect any major deals to happen before the end of this year."   

Both investors agreed that global investors are starting to deal with allocation strategy questions for next year and expect PBSA to be a top choice in 2024 and subsequent years.  

Session moderator Jerry Wojenski, CEO of Varsity Campus, asked the investors about the possibility of over-saturation in the German markets. Scheibli of GSA noted that it is easy to build, and rents are low in some markets, such as Leipzig, while in other markets, such as Darmstadt, significant stock has been added but is fully let, and rental growth has been strong. "So even if you have more beds per student, you still have significant demand, and it's market-specific."

Nonnengässer described a dysfunctional residential market, where in East Germany, rents are lower and available stock is higher. However, in the top seven cities in southwest Germany, PBSA is "functioning well."  

The investors agreed that Chinese students are coming to Europe more frequently than other global regions such as Canada and the U.S. In addition, Germany is now the second biggest market destination for international students after the U.S.

Wojenski asked the panelists if inflation had affected the investor's bottom line, to which both responded, "Yes." Scheibli discussed the high energy costs and increase in utilities following the Russian invasion of Ukraine. However, GSA is working with its property managers to ensure it can access the subsidies the German government has been offering. In addition, GSA has offset the rising cost of utilities by raising rents.

Wojenski asked the investors about rent growth in German markets over the last couple of years, to which both investors offered very encouraging answers.

"If I remember correctly, for Germany, rent growth has currently been six and a half percent in the student sector. I think that ranges from four or five percent up to twelve, thirteen percent, depending on which operator you talk to," according to Nonnengässer. "And, this rental growth reflects the current supply shortage in the German market, which results from various factors, meaning the political environment, rising construction costs, and the recent re-entry of Chinese students."

As the session approached its final few minutes, Wojenski asked the investors if there was anything the audience should know about the German market that still needed to be covered.

Nonnengässer responded to Wojesnki's question, noting that Germany has traditionally been a very quantitative, wide rental residential market. Nonnengässer said most of the layouts of German product date back to the '60s and '70s post-war situation focused on housing families. Today's requirements are coming from PBSA into young professional living, co-living, micro-living, or "whatever you call this trend" or commuting people that need a second place to stay in a completely different qualitative requirement than what the market currently offers.

Scheibli answered that in Germany, his company has competed with coliving, a new product that mixes populations in buildings. Scheibli emphasized the difference between PBSA and coliving. "I see that people should be aware of the differentiation of it and not try to invest in an asset that is doing everything at the same time." Scheibli said that coliving or micro-living tends to be less resistant than other asset classes.

"We prefer to stick to PBSA and see so much potential in Germany that I don't know why we would go for something else," concluded Scheibli.