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ON CAMPUS developers to provide marketing and operational management services at new or existing facilities.
• Build, own, operate transfer( BOOT) – providers partner with universities or other educational institutions on a long-term lease to build, own and operate the student accommodation. At the end of the term( typically about 35 years), the facility is returned to the university. Depending on the terms of the BOOT agreement, the services of the provider can include managing the facility, marketing and leasing the units and maintaining and renovating the facility. A characteristic of the UK market in 2013 was the university lease, which appealed to institutions due to the secure income flow underpinned by the covenant of the university. UK funds such as L & G became the market leaders in acquiring and securing such termed‘ income strip’ deals in this year.
• Develop, strata and management – student accommodation is developed and the lots are strata subdivided. The units are sold to individual investors on the basis that they may be used only for student accommodation and are leased to the student accommodation operator. This model is declining in popularity due to difficulties in financing the purchase of such units and a smaller pool of potential buyers when the owner wants to re-sell.
• Wholly integrated providers – these develop, own and manage the student accommodation properties themselves. They generally buy sites on land near education institutions, with good access to public transport and amenities. They are responsible for developing purposebuilt off-campus accommodation and marketing and managing the property themselves. There has been an increase in the number of institutional investors partnering with experienced student accommodation operators to develop, own and manage student accommodation in recent years. In the last decade, the UK has been dominated by transactions between owner / operators. This pattern will continue in Australia as current players in the market scale up their portfolios.
Developers must pay careful attention to the permitted uses in a particular zone and the applicable planning standards and criteria that apply at a site, as purpose-built student accommodation is a relatively new development category in Australia and planning instruments frequently do not recognise it as a stand-alone category of use.
Local councils are starting to recognise the value of increasing student accommodation supply and are introducing incentives to facilitate this. For example, in February, Brisbane Lord Mayor Graham Quirk announced an 80 per cent reduction on infrastructure charges if developers build student accommodation in certain areas of Brisbane, including within four kilometres of the CBD. The reduction will apply to development applications that take effect between July 1, 2014 and June 30, 2017.
Recent transactions within the Australian student accommodation market include:
• Government Investment Corporation of Singapore( GIC) and Macquarie Capital – In January 2014, these parties entered into a joint venture to buy a majority interest in Iglu, a wholly integrated provider of student accommodation that holds purpose-built facilities comprising over 900 beds in Chatswood, Sydney CBD and Brisbane CBD, with plans to expand further. In April 2015, Iglu purchased a prime development site in Melbourne for close to $ 20 million.
• APG and Scape Student Living – In January 2015, Netherlands-based pension fund asset manager APG and UK-based Scape formed a joint venture with an initial commitment of $ 220 million to develop and manage student accommodation across Sydney, Melbourne, Brisbane, Canberra and Adelaide. The joint venture has so far acquired two development sites in Melbourne with a goal to deliver 1500 beds by 2018, and is targeting the luxury student accommodation market, based on similar Scape projects in the UK.
• UniLodge – has bought three assets in Melbourne previously owned by the YMCA, as the first transaction of an operational direct let asset. The company now has 4000 beds in Melbourne. The pricing has not been published but it will be a good indication of the market yield for direct let assets.
• Marquette Properties – Recently lodged a development application for a 39-storey tower in the heart of Brisbane CBD for student accommodation. The purpose-built student accommodation tower will be one of the largest in the city, with a proposed 753 rooms. This application follows an approval for the refurbishment of an existing office tower to be converted to student accommodation, yielding about 650 beds.
With the UK and the US markets having matured considerably over the last decade, expect large players in those markets to attempt to reap the rewards of the supply gap and higher returns in Australia.
Only 1 in 7 students in Sydney can now access purpose built accommodation, while in London this ratio falls to 1 in 4. Yields in the UK have hardened in the past 12 months, with prime London direct let yields now at circa 4.75 per cent. While there has been little evidence in the Australian market, expect yield of circa 7 per cent in prime Sydney and Melbourne. This investment class will continue to grow in Australia and provide opportunities for both domestic and offshore investors. While the institutionalisation of the sector will be restricted in the short to medium term due to certain barriers to entry, the weight of capital chasing opportunities indicates a positive growth story ahead. ■
Natalie Breen is a partner in Singapore of global legal practice Norton Rose Fulbright. Emily Fell is an associate director, capital markets, at Knight Frank Asia Pacific in Singapore.
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