As the real estate sector in India is growing and evolving, in addition to the historic residential, commercial and hospitality asset class, new alternative asset classes are emerging. The need for new alternative asset classes comes from the ever-evolving consumer demand and consumption patterns. Organised industrial and warehousing development is one such sector that we have seen grown into a large asset class, which is well-funded and established today. On the other hand, other emerging asset classes focus on flexibility and key requirements of end-users, including co-working spaces and student housing.
With education being the key driver of the Indian knowledge economy and large young population, government and the private sector together through Public-Private Partnerships (PPP) have focused on the development of large educational institutions. These institutions are geared to educate and equip individuals with skill sets that will drive the Indian economy. In addition to creating a large talent pool, these institutions also aim to educate students from other countries. Hence, most of these institutions attract students from not only across the country but also globally.
Until a few years back, students would depend on hostels provided by the institutions or rent an apartment to address their housing needs. The hostels provided by the institutions were often not well- equipped with facilities and were seldom maintained in good conditions. The residential rental market sometimes turned out to be too expensive or in some cases, students were not welcome by their landlords. Also, the rented apartments were not serviced and the students were left to themselves to manage the apartments. Security was another issue being in private rental accommodation. However, in more organized and developed markets, student housing is an established business model. There are appropriate housing facilities available for all budgets. This gap in the Indian market has been identified and student housing market has been growing tremendously. Many key players are foraying into the market to provide solutions to the end consumers. Students are being offered housing options on a sharing basis to private rooms to complete apartments. The service providers are also offering a fully fit-out and wifi-enabled along with security services. In addition to the basic living spaces, the students are provided high-quality dining/canteen facilities and other amenities such as library, entertainment rooms, etc., which have been well-received by the students.
Currently, there are various models in the student housing business. The traditional asset ownership and operation model is one of them. Some of the service providers do own their assets, but in the long run, the requirement for high capital for asset creation is detrimental to growth. The other model is the asset-light model, which is highly in vogue. The operators focus on service delivery, amenities, and the overall product. The asset-light model is highly scalable, however, the challenge is to attract landlords. Like every new model, this took some time for landlords to accept. However, there are many precedents of landlords enjoying a good ROI on their investment through revenue share or fixed rentals of such assets. In the asset-light model, the building is owned by a landlord who completely furnishes it as per specifications of the operator and works with the operators on revenue share or rental basis or a low minimum guarantee plus revenue share basis.
The few operators that have emerged in this asset class have so far only touched the tip of the iceberg in terms of market size. There is a large unmet demand in this sector which can be addressed. The sector at this point in time needs capital to grow and the market depth coupled with high margins make this a great investment opportunity. As the vanilla residential and commercial investment space seems to be getting crowded and offer limited returns, private equity investors and large asset purchasers target this as the next big investment opportunity. So far, venture capital and private equity investors are targeting asset-light platforms and as it offers better return on investment. Some of the traditional real estate investors and asset buyers are looking to purchasing these assets in order to earn a high yield on their investment than they would earn on a regular commercial rental asset.
Student housing is definitely an emerging asset class to look out for in India. Due to a large market depth and unmet demand in the space, there are huge opportunities to create a large platform with high return on equity.
(Nitesh Punjabi, Associate Director, Capital Markets and Investment Services at Colliers International India)