Aarusha Homes has around 4,300 beds across 20 hostels in Pune, Bengaluru, Chennai and Hyderabad
In 2008, when Satyanarayana Vejella started his first hostel in Chennai under the brand name Aarusha Homes, he was wading into an untapped segment of the Indian realty market. Real estate funds and investors were keen on buying office space, residential housing and warehousing, but branded hostels for working professionals and student housing was a neglected asset class.
Professionals and students in India have, for the most part, adjusted with rented houses, paying guest (PG) accommodations or hostels run by their educational institutions where the host provides some basic services like internet, food and laundry.
These arrangements tend to be temporary. Security is a problem and landlords are lax about providing quality service as they are serving a market where demand exceeds supply. “This [market] is tricky as it is two businesses—hospitality and real estate—rolled into one,” says Bharat Parmar, partner at Eduvisors, a consulting firm on education.
Globally, student housing and hostels for working professionals is a $200-billion asset class, according to a report by Eduvisors. The segment has attracted capital from pension funds, private equity funds and sovereign wealth funds, who are on the lookout for long-term steady returns.
In India, however, it is a nascent segment with just a few players and demand is largely met by unorganised players (think individual landlords who rent out their houses to say two or three students).
“This is a market that is crying to be organised,” says Shobhit Maleta, co-founder of the New Delhi-based Indecampus, which plans to set up its first student hostel in Dehradun this year and is also scouting for land for a hostel in Himachal Pradesh’s Solan.
Entrepreneurs Forbes India spoke to see more ventures like Indecampus springing up. They expect at least a dozen chains of hostels for students and working professionals coming up in India over the next five years. This would mainly be in clusters near educational institutions, like Kota in Rajasthan, or in places where there is a large population of entry-level working professionals—Gurugram, Pune, Hyderabad and Bengaluru.
Ashish Joshi, managing director and CEO of private equity firm Landmark Capital Advisors, for instance, is setting up a Rs 500-crore fund to invest equally in student housing and warehousing. While studying the market, he says he was surprised by the tailwinds the business has going for it. “The occupancy rate through the year is a high 95 percent. And even though there are two months of vacation a year for students, the fee for the entire year is mostly charged upfront,” he says.
In addition to setting up its own hostels to get a head start, Landmark Capital Advisors also plans to take over the operation of existing hostels at educational institutions. For this, Joshi plans to tie up with educational institutions and integrate the hostel fees with the course fees, while retaining the hostel under the institution’s brand. According to Joshi, many educational institutions are looking to outsource the managing of their hostels, since it is not core to the educational business, as long as they get a minimum rent.
Maleta of Indecampus has arrived at what he says is the thumb rule of what a student hostel can charge. “A hostel can charge only as much as the annual education fees of the institution,” he says. “That is the sweet spot and parents are not comfortable paying beyond that.” So, if it is an expensive private university, the hostel can charge accordingly and offer facilities like air conditioning. For cheaper government colleges, hostels have to cater to a more price-sensitive market. Still, facilities like Wi-Fi, food, housekeeping and security are the bare minimum that one expects. Indecampus’s basic pack for its Dehradun hostel will be Rs 110,000 per student per year, including food.
Despite this being an unorganised market, superior returns of this asset class has attracted investor interest
(This story appears in the 14 April, 2017 issue of Forbes India. To visit our Archives, click here.)