Student financial aid cap a risk to Growthpoint portfolio

The decision by the National Student Financial Aid Scheme (NSFAS) to cap residential allowances for university students has short-changed Growthpoint’s student accommodation division, forcing it to rethink its exposure to lower-income students funded by the scheme.

At the start of the year, the student financial aid scheme decided to cap the annual accommodation allowance for students living at private, off-campus residences to R45 000 for the 2023 academic year.

NSFAS took similar actions for other accommodation types, with self-catering residences managed by universities also receiving the R45 000 limit, while catered university residences received a slightly higher cap of R61 500.

According to the student accommodation real estate investment trust (Reit), NSFAS’s new rate falls short of the market rate by about R20 000 in some of its locations.

As a result, Growthpoint has had to subsidise the government’s funding shortfall for the 2023 academic period, a move that has left many investors uneasy and one that the Reit stresses is unsustainable, especially for landlords who have seen their cost-to-income ratios increasing significantly over the past year.

“With the rental of R45 000, the cost-income ratio is now close to 50% for some of the buildings for this year because now you had these rentals suddenly coming back down,” George Muchanya, the head of Growthpoint Investment Partners, said.

Muchanya spoke on Tuesday during a tour of Growthpoint’s student accommodation assets in Gauteng. Rising interest rates, utility costs and energy costs are just some of the key cost drivers Muchanya mentioned are pushing cost-to-income ratios for landlords outside of the desired realm of 30%.

Derisk the scheme

The government scheme supports the financial needs of lower-income undergraduate students enrolled in the country’s universities and TVET (Technical and Vocational Education and Training) colleges. To qualify for full funding support, students must have a combined annual household income of R350 000 or less.

According to Muchanya, much of the investor uncertainty around student accommodation relates to NSFAS’s policies on funding. The government’s haphazard policy shifts without adequate consultations with sector players have made operating in the sector increasingly challenging.

As it stands NSFAS-funded students account for about 60% of Growthpoint’s tenants across the student accommodation portfolio.

These students typically occupy the cheapest rooms at R4 500 per month over the 10-month education cycle. However, monthly rental costs can go up to just under R9 000.

To limit its exposure to NSFAS, Growthpoint said it’s looking to diversify its tenant base upwards into the middle-to-high-income segment of the student population as growth opportunities still exist in an environment where demand for accommodation outstrips supply.

Read: Growthpoint expands into student accommodation, plans new R2bn specialist fund

“So the emphasis now is going to be on repositioning, at least in the short term, more to something that targets more the middle to upper income and less emphasis on NSFAS until this issue gets resolved,” Muchanya said.

Growthpoint said it is engaging NSFAS, together with its industry peers, to revise accommodation cap allowances upwards from next year to more suitably reflect the costs to build new accommodation that complies with stipulated norms and standards or the capital already invested in existing buildings.

“The NSFAS cap has, unfortunately, added some uncertainty to this property subsector. It is significantly eroding the margins to unsustainable levels given the rising municipal and utility costs,” Muchanya said.

“Sustainable solutions need to be found sooner ahead of the 2024 academic year. Left unaddressed, it is likely to deter investment capital for NSFAS-focused student accommodation. This will be detrimental to the neediest and most vulnerable portions of the student population,” he added.

Portfolio

Currently, the Growthpoint Student Accommodation Reit, branded under Thrive Student Living, accounts for a total of 8 701 beds in the market, spread across 12 buildings mainly concentrated in Gauteng.

In Johannesburg, the Reit owns five buildings between Wits University (1) and the University of Johannesburg (4), while in Pretoria, it has six buildings catering for students studying at the University of Pretoria (5) and the Tshwane University of Technology (1). Another building in Cape Town houses students at the University of Cape Town.

Buildings offer a wide range of amenities, including backup water and power supply, study hubs, computer labs, laundry facilities, access to round-the-clock student life managers, game rooms, fitness facilities and TV rooms. Most accommodation buildings are located within close proximity to their relevant campuses.

Listen: Student accommodation sector continues to thrive – FNB

According to the fund manager of the student accommodation Reit, Amogelang Mocumi, the fund has invested a total of R3 billion to date since entering the student accommodation market with private developer Feenstra Group in 2021.

“The initial R2 billion was to acquire seven properties from the Feenstra Group, and then we’ve built three buildings for about a billion [rand] – [which are] Brooklyn Studios in Pretoria, Apex in Johannesburg adjacent to Wits and then Peak Studios in Cape Town,” he told Moneyweb.

Listen: Legal threats loom for NSFAS as new direct payments system struggles

Although the portfolio remains significantly small compared to Growthpoint’s other portfolios, Mocumi noted that there is still an appetite to pursue the segment, just outside of the NSFAS market.

“The fundamentals for student accommodation are very strong; demand outstrips supply. For investors, you can get a financial return, and we’ve demonstrated that this asset class does have returns.”

“But you also get an impact story. You know that you are effectively providing accommodation for the future consumers of this country, so it’s an asset class that has both ESG [environmental, social, governance] attributes and financial attributes,” Mocumi added.

Investment pipeline

In the near-term investment pipeline, the fund said it has two developments underway, which are set for completion in time for the 2024 academic year. These developments – one each in Pretoria and Johannesburg – will add 1 610 beds to the market.

A further billion rand of investment has been identified for development projects that will onboard new capacity in time for the 2025 and 2026 academic cycles.

Longer-term, the fund has ambitions to grow its portfolio to a value of R12 billion and possibly bag a stock exchange listing by 2040.

Listen to this SAfm Market Update podcast with Fifi Peters:

You can also listen to this podcast on iono.fm here.