Growthpoint: new student financial aid cap a risk to its student res division

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), the 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,” said George Muchanya, the head of Growthpoint Investment Partners.

Muchanya was speaking on Tuesday during a tour of the company’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%.

The government scheme supports the financial needs of lower-income undergraduate students enrolled in 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.

Muchanya said much of the investor uncertainty around student accommodation relates to Nsfas’ 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.

Emphasis now on repositioning

Growthpoint said it was 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.

“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 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,” he added.