A college education is increasingly difficult to afford. It looks like cost is starting to become a hindrance to potential students, which could mean a falloff in enrollment. That could be good news for real estate investment trusts (REITs) focused on student housing.
At one point, a college diploma was the difference between getting an office job and one in which manual labor was involved. However, more and more often, a college diploma is needed to get any job outside of the low paying service sector.
That’s been a huge boon for the education industry. With increasing demand has come increasing prices. In late 2012, Bloomberg reported on a College Board study that showed tuition rose by a greater rate than inflation for that year. Sadly, the nearly 5% price hike was the lowest level in over a decade, a fact that shows just how much prices have increased.
There have also been notable headlines about the next credit crisis unfolding in student loan debt. In other words, more and more students aren’t earning enough to pay their loans. This begs the question of why take on the debt if a good job doesn’t come along with the diploma?
A Turning Point
For years the government stepped in to help students pay for college both via direct support to the student and through financial support for colleges. Today, with the rising concern about the country’s debt load, ever escalating government aid is less likely.
Moreover, if potential students start to question the logic of bothering with a degree, customers will fall off, too. Here the very public government criticism of the for-profit college segment hasn’t helped. While the push to clean that space up was probably justified, it also brought to light the inefficiency of the entire industry.
If this is a turning point, colleges will be hurt. For-profit schools have already felt a big impact. A niche REIT sector dedicated to student housing, however, might actually benefit.
Student Housing REITs
A handful of companies focus on this space. Essentially, they own buildings either on or close to colleges and rent them to students. American Campus Communities (NYSE:ACC), Education Realty Trust (NYSE:EDR), and Campus Crest Communities (NYSE:CCG) are the main players.
American Campus Communities (NYSE:ACC) is the largest owner and manager of student housing in the United States. It owns 160 communities and manages an addition 27, for a total bed count of over 120,000. The company has multiple projects in the works to build new properties and has been an active acquirer.
Education Realty Trust (NYSE:EDR) owns or manages 60 communities in 23 states. Its bed count is much lower at just over 34,000. This company is also expanding via acquisitions and new builds.
Campus Crest Communities (NYSE:CCG), meanwhile, is the new kid on the block, just coming public this year. At the IPO it owned interests in 39 properties with nearly 21,000 beds. Like its brethren, it is expanding via new builds and acquisitions.
Good and Bad
Building what amounts to long-stay hotels on and near college campuses isn’t a bad business so long as college demand remains strong. If demand stagnates or falters, occupancy could become a notable issue. While this risk is across the entire industry, it is also faced at the college level. Ivy league schools are likely to see higher demand than a lower tier player.
However, these companies can continue to expand by opening or acquiring more locations near in-demand schools or taking over housing from struggling colleges. The latter could be a notable avenue of growth as the government cuts school support and administrators look to maintain services to remain competitive with better funded schools.
In this regard, the student housing REITs could be something of a counter-intuitive play on a transitioning college sector. Indeed, the housing REITs get paid regardless of the jobs that students wind up with or their ability to pay student loans after graduation. As long as a college degree remains an important part of “getting ahead,” there will be demand for student housing.
While the number of colleges is a limiting factor on the sector overall, it appears that none of these companies is close to being hindered by this fact. This will be true even if closings and consolidation takes place because of the current scrutiny of the secondary education industry.
Watch and Wait
Only Campus Crest’s yield of near 5% is truly enticing at the moment, though an impressive share price advance limits upside potential. Still, investors should keep American Campus Communities (NYSE:ACC) and Education Realty Trust on their watch lists waiting for a pullback.
The article Rising Costs a Good Omen for Student Housing REITs originally appeared on Fool.com and is written by Reuben Gregg Brewer.
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