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This Student Housing REIT Should Be on Your Radar

[Updated: Aug 06, 2020] Oct 03, 2019 by Matt Frankel, CFP
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There are real estate investment trusts (REITs) that invest in just about every type of real estate you can think of. Student housing is one particularly interesting specialization.

There's only one major publicly traded REIT that focuses on student housing properties. But this is a largely untapped market that could have lots of growth potential in the years ahead. Here’s an overview of what a student housing REIT is, as well as some information about the major student housing REIT you can invest in.

What is a student housing REIT?

A real estate investment trust is a special type of company whose primary business is to invest in real estate assets. Most REITs focus on a subsector of real estate, like office , residential , or retail properties. And many of them specialize even further, focusing on a single type of property.

Student housing REITs exclusively focus on apartment properties designed for college students. This is a subsector of the residential real estate market.

Student housing REITs exclusively focus on apartment properties designed for college students. This is a subsector of the residential real estate market.

Think of the properties owned by student housing REITs as dorm replacements. Most on-campus housing options are outdated and expensive. And off-campus housing options typically aren't designed with students in mind. Student-specific housing options owned by REITs can be on or off campus, and they offer modern living spaces with student-focused amenities. Importantly, the price is comparable to (or even less than) school-owned housing.

As I mentioned, there's only one major publicly traded REIT that specializes in student housing properties. Here’s why it should be on your radar.

A student housing REIT worth looking at

American Campus Communities is the only student housing REIT in the market. And it’s a big one, with 170 properties that can accommodate 109,100 students.

American Campus Communities targets markets with limited purpose-built student housing. And its properties are far better than its main competition (dorms). In the company’s 69 target markets, 75% of the student housing supply is dorms or non-student-specific housing. The median age of on-campus housing in these markets exceeds 50 years. These options don’t offer much in the way of privacy or amenities and they have outdated technology infrastructure.

What’s more, American Campus Communities’ average rent per month is just $10 more than the average shared on-campus room. And it's about $200 less per month than the average private on-campus room. That's a good environment for a business to operate in.

This REIT also has a strong record of value creation through development. Since its IPO, the company has invested $4.7 billion between on- and off-campus development. The average property produces a 6.25%–6.75% yield, much better than the 4.0%–4.75% that can be achieved by acquiring existing properties.

The proof is in the performance. Since its 2004 IPO, American Campus Communities has generated a 342% total return (10.4% annualized) and has grown more than tenfold in size. Even so, the company’s entire portfolio of properties could accommodate less than 0.7% of the 16 million college students in the United States. So there’s still ample opportunity to grow in the years ahead.

Dorms are so old-fashioned

Consumer tastes evolve over time, and this is especially apparent when it comes to student housing. Each year, more students are ditching antiquated dorms in favor of purpose-built, modern communities.

If this trend continues, a student housing REIT could be a smart addition to your portfolio.

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