Asian investors looking past disruptions to student housing

Despite half-empty dormitories this year, institutional investors remain confident that student housing will remain an attractive long-term bet on the Asia-Pacific region's growing middle class.

While the market's backdrop has become considerably "noisy" of late, the 15.5 trillion won ($13.5 billion) Public Officials Benefit Association, Seoul, is moving to make its first investment in student housing by year-end or early next year, noted Dong Hun Jang, POBA's chief investment officer, in an Oct. 26 interview.

The global coronavirus pandemic and geopolitical tensions may have dented the "safe, stable" image of student accommodations but to the extent parents in China, South Korea and other Asia-Pacific countries remain "very dedicated" to their children's education, the investment thesis should pan out over the long term, Mr. Jang said.

He declined to say how much POBA would be investing in the sector.

Likewise, Korea's 750 trillion won National Pension Service, Jeonju, announced in October it had partnered with APG Group, a Dutch pension investor, to invest in a fund managed by Scape Australia, Australia's biggest student accommodation provider with about A$3.3 billion ($2.3 billion) in assets under management. APG oversees €536 billion ($627.8 billion) in retirement assets including the €463 billion Stichting Pensioenfonds ABP, Heerlen.

An NPS spokeswoman confirmed the investment but declined to give further details or comment on reports that NPS had invested A$300 million in the Scape Core Fund.

A number of institutional heavyweights, including GIC Pty. Ltd., a Singapore sovereign wealth fund with estimated assets of more than $400 billion, and Canada Pension Plan Investment Board, the C$434.4 billion ($329.2 billion) Toronto-based fund, have invested in student accommodations as a means of tapping into the relentless growth of the Asia-Pacific region's middle class.

Executives with those asset owners — whom analysts figure have invested more than a billion dollars each in student accommodation over the years — say the "out of left field" hit from the pandemic, while considerable, hasn't soured them on the sector.

Demand for student housing is facing "unprecedented challenges" due to COVID-19, with uncertainties regarding the extent of return to on-campus classes, the cross-border mobility of students, as well as whether geopolitical tensions could thin the ranks of international students, Lee Kok Sun, GIC's chief investment officer of real estate, said in an email.

But even if there's likely to be a wider dispersion of outcomes over the short term, GIC's investment team remains confident in the sector's longer-term story and will continue to proactively seek out student housing opportunities with good risk-reward trade-offs, he said.

Data from London-based real estate advisory firm Savills PLC showed global investment in student housing standing at roughly $12.6 billion this year through Oct. 27, off a record pace of $17.8 billion for all of 2019 powered by an $8.5 billion fourth quarter.

The year-on-year comparison for the three quarters through Sept. 30, however, actually showed the current year's investment total up more than 17% to $10.6 billion from $9 billion the year before.

On balance, those numbers paint "a really positive narrative around the resilience of PBSA (purpose-built student accommodation) during the pandemic, which also speaks to the countercyclical nature of the asset class," said Conal Newland, Sydney-based national director, student accommodation, with Savills Australia and New Zealand.

Savills' current year-to-date totals include a record $1.9 billion of investments in Australia, mostly reflecting a consolidation play by Scape, which has acquired two of its biggest domestic competitors over the past year.

With those acquisitions, Scape now operates 14,000 of the roughly 80,000 rooms in Australia's PBSA sector, with plans to develop another 16,000 over the coming three or four years, Stephen Gaitanos, Scape's Sydney-based managing director and group CEO, said in an interview.

Still, the coronavirus lockdowns, in particular the shutdown in travel from China — the source of Australia's biggest overseas student population — have resulted in a considerable drop in occupancy rates for purpose-built student housing facilities.

Most student accommodations in Australia, both on and off campus, have been between 50% and 70% full this year, which for many operators is not great but not desperately bad either, Mr. Newland said.

Craig Carracher, Sydney-based chairman and co-founder of Scape Australia, agreed, saying in a podcast this month with Ready Media Group "we're obviously above what I'd call a threshold pain level across our sector, which I think for purpose-built student housing is that 40% to 45% net occupancy range, where we start to feel some pain."

"At 50% and above, because the margins are there and we've been able to scale back our operational base and still deliver our service standard as well as do some deals in various places with how these buildings are being used, I think most of our sector has been able to navigate 2020 safely," Mr. Carracher said.

Safely, perhaps, but not necessarily profitably, analysts say.

"That occupancy rate assumes zero or minimal operating profits," noted one investment consultant in the region, who declined to be named.

And depending on an operator's leverage structure, banks could move to call back loans way before a firm's operating profits evaporate, the consultant said. Foreclosure moratoriums in place now could ward off that risk for the next six to nine months but "longer term, it's anybody's guess," the consultant added.

Meanwhile, some industry veterans note that operators such as Scape have had to be opportunistic to maintain that 50% occupancy rate.

For example, operators have pivoted from a pure focus on student accommodations this year and leased out facilities to the government for "social housing" for the homeless or for victims of domestic violence, noted Paul Gately, Sydney-based managing director and head of Australia for Baring Private Equity Asia Real Estate.

For investors in those properties, the current year must be close to "a write off," Mr. Gately said, adding that with so many recent investments made at the "top of the market," investor returns will be impacted.

Net yields for investors in student housing, before leverage or rental gains, could fall to roughly half of pre-pandemic levels for the near term — to around 3% from 5% or 6%, said Henry Ching, head of Asia Real Estate at Mercer Investments.

Even so, market veterans note that the tough times the sector is experiencing this year are offering up little for bargain hunters.

"While we would have thought there would be more dislocation in the market and more issues around it, the longer-term nature of the capital that's been backing these plays (has meant that there's been) no real distress or mispricing," said Ruban Kaneshamoorthy, Sydney-based senior vice president, real estate, with Brookfield Asset Management.

Brookfield is a veteran student housing investor in Europe and Mr. Kaneshamoorthy said his team is following Asia-Pacific opportunities with interest but has yet to invest in the region.

Master lease structures, which can leave a university under some obligation to cover rent payments even if occupancy rates fall, could be one factor limiting the hit investors are facing this year, said Mercer's Mr. Ching.

Jyoti Ramchandani, a fund manager with Singapore-based SC Capital Partners Group, said her firm's almost $800 million SCore+ Asia-Pacific real estate fund has $145 million in student accommodation exposures across five assets – one in Sydney, one in Wellington, New Zealand and three in Japan.

But with four of its five student housing assets enjoying long-term master leases, SC Capital hasn't had to scale back its projections for returns this year, Ms. Ramchandani said.

Savills' Mr. Newland predicts student housing should prove resilient, with the fallout from the pandemic having "a short-to-medium (term) impact on the market," rather than a long-term, structural impact.

"I'm a firm believer that we'll see international students start to return quickly and … we'll see performance across the sector rebound relatively quickly," he said.

It could take until the second semester of 2021 before things seem to return to normal, but "I think the majority of the ground that's been lost will be recovered in a relatively shorter time frame," Mr. Newland said.