Student housing: A booming market or a bad investment?

The increasing number of students looking for accommodation may seem like a golden opportunity for real estate developers, yet the market can be frought with pitfalls

With an increasing number of foreign and local students in Lebanon, real estate developers have tapped into a new market. Private student dorms, hostels, hotels and furnished apartments ranging from the five-star to the budget are opening on an almost monthly basis, ready to cater to the ever-widening range of needs and demands of the student population. Yet real estate developers are divided as to the commercial viability of such projects, saddled as they are with low returns and high wear and tear. There is also the specter of an increase in supply of on-campus accommodation. But for the time being at least, many students are opting for the off campus option.

Taking their business elsewhere

The need for privacy tops the list of requirements for many students, in addition to the desire for space and cleanliness. With some rent prices off campus comparable to those of the student dorms, several students are choosing to hit the private housing market. “I saw the dorms at LAU, and it wasn’t pretty,” Natasha Kaskas, a 20 year old graphic design student at LAU, commented. “Nor were the AUB dorms. They’re not clean, and there are too many girls for one bathroom. It’s just not sanitary.” Kaskas opted for a private student dorm – one of the many that have been flourishing around the AUB and LAU area. University Residence has been her home for the past three years. At $375 a month for a shared room – less than LAU’s student dorm rents of $400 a month – Kaskas gets a bathroom to share with her roommate, cable, internet access, hot water and electricity 24/7, free cleaning and laundry.

“I looked everywhere, and there were no good places to live, except for here,” said Kaskas. “It’s cleaner and more private. You only have to share your bathroom with one roommate, but you also have the choice of living alone. There are just so many facilities here. I’m all set.”

The all women’s private dorm has experienced a steady increase in applications since it opened over three years ago, most notably from foreign students. “Our main target is foreigners – Saudis, Kuwaitis, Jordanians, Syrians,” building manager Abir Alameddine explained. “The number of applicants have more than doubled over the course of the last two years. Right now, the most represented nationalities in the dorm are Kuwaitis and Saudis.”

In addition to the free services – which appeal to the students – the dorm has successfully been able to gain the confidence of parents through its strictly enforced no males and no alcohol rule, as well as its 24-hour security service and the option of an imposed curfew on the resident. As a result, some parents are willing to pay up to $630 a month for a suite for their daughters in the dorm.

This high-end of the market is one that developer Ramzi Tarcha, owner of Koura Residence in the north of Lebanon by Balamand University, has successfully exploited.

At rates ranging from $210 to $290 a month – high by local standards – Tarcha offers luxury accommodations replete with a restaurant, gymnasium, pool room, in addition to standard services such as internet, cable, laundry and cleaning. “We studied the market for some time and gathered that there was a demand for it,” he explained. “We decided to go for a luxurious place, so as to differentiate ourselves from other student accommodations, and basically give students a five-star hotel life-style. Also, by deciding to locate up north close to Balamand University, we got rid of most of the competition – Beirut being completely overcrowded – and were able to buy land at a much cheaper price.”

Despite the steep rent, Tarcha said many residents take the double rooms for themselves, willingly paying twice the price for their rooms. “The residence can accommodate 100 people, but a lot of students take a double room for themselves and pay double the price, so right now we have 76 people who provide us with full occupancy,” he said.

Tarcha puts his success on finding an underexploited niche in the market, in an area where demand for student housing is rapidly increasing. “We have targeted different people with a different mentality, who are willing to pay a great deal of money to provide their children with a certain comfort to entice them to study,” he said. “So far, our marketing strategy has proven to be a good one. Also, the Balamand University dorms only have room for 150 students, and the university keeps on growing, so we are benefiting a lot of this.”

Hard to break even

Yet despite Tarcha’s success, some real estate experts would say his experience remains an exception to the rule. Lara Kanj of the real estate department of the Ashada Group, which specializes in the construction industry, has conducted two studies on the profitability of developing land for student housing purposes. Both times, the conclusion was that the investment would not be worthwhile. “If you want to break even, you should sell, not rent out, especially if rent is low,” Kanj explained. “If you build a building for the purpose of renting out the units, the rent is usually set at 8% of the costs. But with student housing, the rent needs to be much lower than that – it would take too long a time to break even.” Kanj recommends investing in student housing if you are already a building owner. “If you already own a building and you are breaking even with the finishing costs that you invest in it, then you could get by,” she said. “But if you are starting from scratch and need to take a loan from a bank, than you are not likely to make it.”

Ahmad Jammal, the manager of a furnished apartment residency by Verdun, who wrote a thesis on the real estate market in Beirut, concurred with Kanj. Starting off with a strategy of targeting students for his residence, Jammal rapidly reevaluated his plan and switched to the expatriate market instead.

“It does bring in profit, but it is not justifiable compared to the profit you can make in renting to non-students,” Jammal said. “Students will always reach a maximum level of rent beyond which you can’t go. To be profitable in this business you have to target those people who are willing to pay more. Students require a lot of overhead: you need to do a lot of repair after them, as they tend to break things, they get things dirty … they are a little careless. So the combination of low to medium rent, in addition to a lot of overhead, makes this a non-profitable business.”

Supply at risk of exceeding demand

Compounding the challenge is the gradual crowding out of the market. In addition to the multiplying number of private housing facilities for students, the universities themselves are stepping up to the plate to meet their students’ needs. USJ is in the process of building a student dorm, predominantly meant for its foreign students, which will be ready in 2005. AUB is following suit, and is conducting a market study to assess the competition it is up against from the outside. Considering the fact that the university is presently able to meet its entire demand for housing, an increase in its offer could well ensure it’s recovery of a larger chunk of the market. Despite the lack of privacy and restricted freedom through curfews, the AUB dorms do offer the advantage of relatively low rent – set at $1,060 per semester for a shared room – and the convenience of living on campus, with fellow students.

“The social life is very important to the students, which plays a big factor in their decision to stay here,” said Nawal Semaan, co-coordinator of student housing at AUB.

The campus dorms also guarantee greater security, which, according to Tarek Naawas, dean of students at LAU, has been a problem for some students living in private accommodations. “We do fear that parents might have issues with the level of security in these places, which are definitely not comparable to the security we can provide our students,” he said. “So when we are asked, we do inform parents of this. There have been many complaints linked to security and to theft.”

Some also question the likelihood of the number of students continuing to expand. “There isn’t a crowding out yet, but in five years there probably will be,” a real estate expert, speaking on condition of anonymity, predicted. “Both AUB and LAU fees are increasing, and if you look at the income per capita in Lebanon, you understand that it is getting harder for people to afford university fees. There were more financial resources to assist students in the past. These have now stopped because the focus is to develop technical expertise over academic expertise.”

A potential goldmine upon certain conditions, the student housing market remains one to be carefully trodden into.

An ever expanding student population

Traditionally a destination for study in the Middle East, Lebanon has seen a significant rise in the size of its student population over the course of the past decade. Between 1993 and 2001, the student population in Lebanon increased by close to 60%, reaching 119,487 students by the academic year 2000 to 2001.

The events of September 11, 2001, further boosted numbers, with an increasing number of students from the region turning to Lebanon out of frustration with lengthy US visa procedures and the threat of discrimination.

For the academic year 2003 to 2004, Nadine Naffah, an associate director of admissions at the AUB was quoted as telling the DAILY STAR that the number of students applying from the Arab world had jumped by 41%, with the largest number of applicants coming from Saudi Arabia and Kuwait. “September 11 probably affected the numbers, but we can’t be sure of that,” she said, adding that the increase could also be linked to the university intensifying its recruiting efforts in the region.

At the AUB, the number of students has been steadily increasing by 7% to 8% over the last five years, reaching close to 7,200 today, a quarter of which are foreign students. USJ has seen its student population increase by over 10% since 2000, from 7,200 to over 8,000, with its number of foreign students rising by 34%. LAU has witnessed an increase of 40%, with approximately 7,200 students today.

Many Lebanese students, especially freshman students who live far away, like to live in the dorms, as their parents prefer for them to live on campus. Both LAU and AUB are rapidly reaching their maximum capacity intake for student accommodation. The former can accommodate up to 120 students at its Beirut campus – 2% of its student body. For AUB, the figure stands at 474 places for women and 374 for men – 12% of its student body. USJ presently has no student dorms available. With the number of applicants rising, both LAU and AUB are seeing themselves forced to make students double up in rooms.

“Many students ask for private rooms, but we can’t give it to them until we have met all the demands for accommodation that we’ve received,” said AUB’s Semaan. As a result, the university is presently meeting all its demands for accommodation, but the number of students granted their own rooms are few and far between.