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Australia: The enduring merit of education
In the near-term, the headwinds are real and protracted given the disease’s broad and indeterminate impact on global mobility and in turn, university applications and enrolments.
There will be short-term pain for the purpose-built student accommodation (PBSA) sector. But robust structural demand and limited high quality supply will continue to back the enduring attractiveness of beds that go along with education in a globally diversified portfolio.
Near-term concernsWith most countries still in full or partial lockdown, the future of international education – and the mobility of students – is at a crossroads. The uncertainty of travel plans and resumption of on-campus teaching, on top of safety concerns have disrupted short-term admissions.
Financial constraints will also become a greater barrier, with parents and students unable or unwilling to raise funds for an expensive international education amid an uncertain employment outlook. Students depending on part-time work to partly fund their studies will also face challenges during this downturn, made worse as universities curtail scholarships.
Economic downturns significantly affect mobility and in particular, student flows from lower middle-income countries to high-cost study destinations. A good example is when India, the world’s second-largest sender of international students, experienced an economic crisis in the early 2010s (figure 1).
Much will depend on the duration of the global pandemic. The longer it lasts, the more international students might change their plans. A prolonged global recession or lackluster recovery will likely impede student mobility much more severely and for longer.
A recovery in the international education market is also contingent on any quality improvements in domestic provision which may keep a higher proportion of school leavers in their home countries. China, South Korea and one or two southeast Asian countries may recover from the pandemic sooner with the advantage of retaining students who might have gone abroad to study, as well as attracting more international students from the region and beyond.
Structural upside overwhelms cyclical downsideThere is no doubting the quality and importance of higher education in Australia. From just under A$7 billion two decades ago, the sector grew by 8.7% CAGR to A$39 billion in 2019 to become the nation’s largest services export. This rise of the international education sector is born out of many structural undercurrents that can and will ride past the current short-term headwinds.
Affordable, high quality education in a competitive global market. There are 37 Australian universities ranked among the top 1,400 globally, according to The Times Higher Education World University Rankings 2020, with six featuring among the top 100 led by the University of Melbourne at #30. Equally important, the quality of education also complements the quality of life afforded to international students.
According to the Mercer Quality of Life City Ranking in 2019, five Australian cities, led by Sydney, ranked among the top 30 globally, ahead of the highest ranked city in the U.S. (San Francisco) and U.K. (London). Yet, the cost of living stayed well behind other international cities: Sydney, the most expensive city in Australia (ranked #66 globally) is well behind New York City (#6) and London (#19).
The depreciation of the Australian dollar has not only underpinned the cost of living, but also the affordability of an international education. Take China – the biggest international student market for Australia – as an example. The cost of an education in Australia is about 37% cheaper compared to the U.S. on average over the past five years (figure 2) for Chinese students.
Australia’s demographic dividends from overseas. Asia Pacific will account for about half of global output and a third of global consumption by 2030, led by the fast-growing developing economies such as China and India. The rapid pace of urbanization and rise of the middle class and wealth has been, and will continue to be, the lynchpin of growing overseas education demand.
Over the past decade, the number of middle class households earning between U.S.$35,000-$70,000 (current prices) in the three biggest student overseas markets – China, India and Indonesia –grew by 37 million or 16% CAGR. It is expected to grow by another 145 million (15% CAGR) in the next decade to 193 million, which is close to the population of Japan and the U.K. added together. And despite growing by 13% CAGR from 2002 to 2019, there is little reason to believe that the long-term demand from Chinese students for an education in Australia will diminish (figure 3).
Domestic student pool is rising too. Unlike many global economies running population deficits due to low birth rates, there is still an untapped demographic dividend that will continue to underpin Australia’s education sector.
While Australia’s population growth is forecast to slow to 1.2% CAGR over the coming decade (compared with 1.4% over the last 10 years), the population aged between 0-19 will be around 35% of the total population. Backed by high immigration, this will continue to supplement the total number of students heading to higher education in the years ahead.
Treading water, not drowningThere are still many positive undercurrents for the PBSA sector, in view of the structural tailwinds blowing the way of the Australian higher education sector.
While the pandemic has posed strong near-term headwinds, the fundamental justifications also continue to point to longer-term resiliency. As the third largest education market globally and despite additional beds being supplied in recent years, Australia remains under-supplied vis-à-vis other global markets (figure 4).
Even as supply continues to expand in the coming years, the current provision rate (beds as a percent of total student population) at 6% remains significantly low – the classic case of supply chasing demand. This, in turn, is helping to support a drop in asking rents of only around 10% during this pandemic period.
The PBSA sector in Australia is treading water, not drowning, considering the sizable downdraft from Covid-19 on real economic activities and mobility on other traditional real estate sectors such as retail and office. An ongoing exposure to the sector can help to smooth returns and provide diversification to a global portfolio.