Investing in student hostels has become big business in Hong Kong as returns in other property sectors dip. Experts have called for effective, long-term planning to prop up the student housing market, making the city a diversified property investment destination. Oswald Chan reports.
Accommodation for students is emerging as an attractive alternative property investment class in Hong Kong amid a shift in the city’s educational policy and the diminishing appeal of the traditional residential, office, retail and hotel sectors.
Besides being a magnet for professionals, the special administrative region aims to be a global educational hub. In the 2023 Policy Address, the SAR government set out strategic directions and objectives to turn Hong Kong into an international education center by doubling the admission quota for nonlocal students at government-funded postsecondary institutions from 20 percent to 40 percent, and expanding scholarship programs to raise the Belt and Road Scholarship quota by 50 percent and the Hong Kong PhD Fellowship Scheme by one-third.
Other proposed measures include prioritizing the development of postsecondary education in the Northern Metropolis with the proposed Northern Metropolis University Town in Ngau Tam Mei. The administration also aims to increase the supply of hostel accommodation by 13,500 beds by 2027 under the Hostel Development Fund, set up in 2018.
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However, market supply far from meets the projected growing demand for student housing. Data from the Education Bureau and the University Grants Committee show that enrollment of nonlocal students at local postsecondary education institutes grew by a compound average growth rate of 11.6 percent from 2018 to last year.
Successive SAR administrations have progressively raised the proportion of nonlocal students in tertiary institutions from two percent in 1993, to 10 percent in 2005, 20 percent in 2008, and 40 percent last year.
Global real estate advisory firm Cushman & Wakefield estimates there will be a shortfall of nearly 55,400 student accommodation beds in the market.
Meeting housing demand
Besides imbalanced demand and supply, the declining attractiveness of the traditional favorites of office buildings, retail premises and hotel rooms has fueled investments in student dormitory accommodation.
According to Colliers International (Hong Kong), there is oversupply in the office-and-retail leasing sector. Stocks of grade A office buildings in Hong Kong in 2025 and next year will be close to 5.5 million square feet, while rents for grade A offices have plummeted by 30 percent from their peak due to fierce market competition. The global real estate advisory firm sees office rents plunging by a further 8 to 9 percent this year.
This year alone, there will be an excess of more than 4 million square feet in retail space in shopping centers, pushing down rental returns for some retail properties. For hotels, the recovery pace in Hong Kong’s tourism industry remains constrained even after the lifting of all anti-COVID-19 measures in 2023, and their occupancy rates are not satisfactory.
The relative allure of student housing investment is manifested in higher rental yields and stable cash flows.
“The supply of student accommodation is limited, offering investors quite good returns,” says Kathy Lee Yuen-yan, head of research at Colliers International (Hong Kong). “There is oversupply in the office and retail leasing sector. This explains the low rental yield, compared to student accommodation buildings.”
According to Colliers, Hong Kong’s student accommodation leasing sector can expect rental yields of between 5 and 6 percent after deducting operating expenses — surpassing those in the residential, office and retail leasing sectors.
Billy Mak Sui-choi, associate professor at Hong Kong Baptist University’s Department of Accountancy, Economics and Finance, calls student dormitory property investment a “cash cow bet” for institutional investors seeking stable investment returns. This is partly because families of nonlocal students are willing to pay one-year rent upfront to secure accommodation due to limited supply. These families like the features of communal study areas, social spaces, and security services offered by professionally-managed student accommodation buildings.
“Student hostel premises can provide a more stable and positive cash flow projection for investors as economic cycles have less impact on rent forecasts for student buildings, compared to other property investment sectors,” Mak tells China Daily.
In the past two years, institutional investors have been actively entering the student housing market through joint ventures with local operators and landlords. Investors can enjoy economies of scale in student housing management and marketing expertise provided by operators and landlords.
In 2022, Hong Kong developer Wang On Properties and US private equity firm Angelo Gordon acquired Pentahotel in San Po Kong from New World Development for HK$2 billion ($256 million), with the property having since been converted into a student housing facility operated under Wang On’s co-living brand, Sunny House.
Boston-based fund manager AEW Capital Management teamed up with local developer Crystal Investment in 2021 to buy Hotel Sav in Hung Hom for HK$1.65 billion, with that property rebranded as Y83.
Experts warn that institutional investors should monitor investment risks associated with student housing, including the cost of capital, policy direction, and the cumbersome facility conversion process.
“Erratic US interest rates this year, definitively, will have a significant impact on investors’ decisions,” says Tom Ko Wai-hung, investment and advisory services executive director at Cushman & Wakefield. “If the returns from deposits are higher than, or similar to those of student hostel investment, they would put off their investments.”
“This uncertainty would affect investing in student accommodation properties, considering the costs involved in turning buildings into hostels. High interest rates might force investors to put their plans on the back burner,” Lee agrees.
Mak believes investment prospects could hinge on government policies for student housing. “Investment risks are associated with whether local universities can provide more student hostels. This would depend on the HKSAR government’s policies.”
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Another negative factor is the cumbersome conversion process. Currently, it takes two years for investors to turn commercial buildings into student dormitories. The process includes vacating and renovating the buildings, as well as applying for hostel licenses. Investors also have to consider technical knowledge and red tape — the time required to get the nod from the authorities for conversion.
The government should streamline market regulations to expedite supply, according to Lee. “Would the authorities consider issuing student housing licenses similar to those for hotels? Or would building regulations be similar to those for converting offices into hotels?” he says.
As market forces propel student accommodation into becoming an alternative property investment class, real-estate analysts suggest that Hong Kong deploy short- and long-term plans to make the city a preferred destination for student accommodation property investment.
The short-term approach would allow existing buildings to be used for other purposes, creating a regulations-friendly environment and offering low-interest-rate loans to landlords for conversion work to expedite student housing supply.
Lee suggests revitalizing commercial buildings by enabling existing grade B and C office buildings with low occupancy rates to be turned into student hostels.
Ko urges the government to refine the entire conversion process, such as allowing landlords to submit student hostel applications in parallel with, or even before, renovation work starts, so that the period from acquisition to operation could be shortened from two years to 15 to 18 months.
Streamlining processes
The government could also include “student hostel” as a new land use category, with waivers for changing use of land from commercial or hotel properties, Ko said. “Under such a category, landlords and investors would no longer have to apply for a separate hotel license. This would alleviate potential constraints faced by an office-to-hotel conversion project, such as the requirement to provide loading/unloading areas and car park spaces,” he added.
The SAR will launch a pilot program in the first half of this year to simplify processing of applications relating to planning, land and building plans, encouraging investors and operators to convert hotels and other commercial buildings into student hostels.
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The Planning Department will advise the Town Planning Board on conversion projects with support from the Education Bureau, while the Buildings Department will flexibly handle the problems of exceeding maximum plot ratios, or gross floor areas arising from conversion. The authorities will also make suitable sites for the private sector to build new student hostels, if needed, to cope with market demand.
But, adopting short-term strategies alone to accelerate supply is not adequate. Long-term plans need to be formulated to provide land for purpose-built student accommodation.
“Hong Kong has yet to be a mature student housing leasing market because most of the student dormitory conversions are not purpose-built. If we want to be a world tertiary education hub, we should provide designated land supply for building student accommodation units,” says Lee.
The government should also apply a “build-to-rent” development model to provide rent-only land for student housing as this would be specifically for rental purposes — a plan that has become popular in the international real-estate market.
Perhaps, suitable land could be allocated near the proposed San Tin, Hung Shui Kiu and Lau Shan development area to help meet the demand for student housing, says Lee.
Contact the writer at oswald@chinadailyhk.com
