Singapore tops in 2016 cross-border student housing deals

Singapore

SINGAPORE was the largest cross-border investor in student housing assets globally in 2016, much of it fuelled by GIC's massive investment in the sector, which continues.

On Thursday, GIC announced a US$1.6 billion purchase of student housing portfolios in the US with partners, beefing up its investment there to almost US$3 billion in less than a year.

According to commercial real estate database Real Capital Analytics, some US$3.3 billion from Singapore has made its way into student housing in 2016, exceeding all other countries by leaps and bounds, although that was partly due to the city-state's limited pool of domestic assets.

While the US invested only US$538.7 million cross-border in student housing, its own domestic investments in the sector totalled US$5.6 billion (versus nil in domestic investments for Singapore).

Besides GIC, corporates such as the Temasek-backed Mapletree Investments, Far East Orchard and Centurion have also been diversifying into this alternative real estate asset class.

Student housing is enjoying strong demand and supply fundamentals and steady rental growth at the moment due to a shortage of modern student housing stock.

There is not enough purpose-built student accommodation around, which is different from on-campus housing (which is usually poorer in quality), despite a growing demand for them in university towns as students begin to place more importance on their living experience abroad.

The sub-sector is also more defensive compared to other traditional real estate sub-sectors, with same-store revenue growth staying positive even in the global financial crisis. Student housing is also less leveraged on the economic cycle, unlike office, retail and industrial properties.

Compared to these latter sectors, they also enjoy larger spreads over long-term bond yields - at more than 300 basis points in the UK, the US and Germany, and about 400 basis points in Australia, based on Feb 17 bond yields.

Increasing institutional interest and ownership in the sector also help to support asset pricing and provide exit options over the longer term.

Globally, new investor types including private equity, Syariah-compliant financial institutions, pension funds and high net worth individuals have also entered the space.

Notable investors in student housing now include the Canada Pension Plan Investment Board (CPPIB), Abu Dhabi Investment Authority and Starwood Capital.

A further sign that the market segment is maturing is the emerging securitisation of student housing assets.

According to Global Property Research, there are six student housing real estate investment trusts (Reits) globally - three in the US (American Campus Communities, Education Realty Trust and Equity LifeStyle Properties), and three in London (Empiric Student Property, GCP Student Living and The Unite Group).

Peter Verwer, CEO of Asia Pacific Real Estate Association (APREA), said he would not be surprised to see student housing Reits listed in Singapore soon. "Singapore's Reit market is also forward-looking. We already have healthcare Reits and data centre Reits."

But what is driving Singapore companies' interest in what had for the past few decades largely been a quiet sector quite devoid of commercial operators and market transactions? Those with student housing exposure cite the need to diversify their portfolios by pushing new frontiers.

Lui Chong Chee, group CEO and managing director of Far East Orchard, said: "Student accommodation is a resilient asset class with counter-cyclical fundamentals, which fits well with our strategy of enhancing recurring income streams."

Far East Orchard has two assets in the UK and is developing three more. Mr Lui added that the company had moved into the market in 2015 to expand its property development portfolio beyond the Asia-Pacific into Europe.

A GIC spokesman said that from a total portfolio perspective, student housing provides diversification benefits from the other traditional property sectors as it is less volatile and less dependent on the economic cycle. "We saw an opportunity to reap the early mover advantage into a sector which offers attractive yields and risk-adjusted returns with potential institutionalisation of the sector."

Andy Tan-Chye Guan, chairman of APREA Singapore, added that the investment universe of institutional real estate investment has been steadily expanding and will continue to broaden. The inclusion of student housing as an investable asset class is but a natural evolution.

"As traditional asset types like office and retail property mature, more investors participate and drive prices to record highs and yields plummet. This is made worse by the ultra-low interest rate environment. As a result, investors need to be constantly on the hunt for emerging sectors like student housing to achieve superior risk adjusted returns.

"Not so long ago, even hospitality and industrial property were not considered mainstream and were too exotic or raw. Today, they are common terms in the real estate investment lexicon which also includes healthcare, data centres and the like.

"One must always remember that real estate is cyclical in nature. I see the ultra-low interest rate environment dragging out this cyclical nature, thereby providing this window of opportunity for new sub-sectors to emerge as new frontiers."

The student housing sector has its challenges, however. For one thing, it is typically fragmented, making it difficult for investors to achieve scale.

In the US, for instance, the top 10 players own less than a tenth of the off-campus student housing market, according to a Student Housing Business report.

With each asset being fairly small in size, it would be time-consuming and resource-intensive to accumulate a sizeable portfolio. To this end, most analysts are expecting consolidation in the sector. It is already happening.

Jo Winchester, senior director of valuation and advisory services, student accommodation, at CBRE UK, said: "We have already seen the creation of several large platforms in the last two years. Besides the growth of the Unite fund, we have seen CPPIB acquire (student accommodation provider) Liberty Living and the Student Castle portfolio ... "

"We have also seen the formation of IQ Student Accommodation, in a joint venture between (British charitable foundation) Wellcome Trust and Goldman Sachs, which owns 23,000 bed spaces. We expect to see these platforms acquire more schemes, but other parties are also in the market to acquire more stock as well."

The barriers to entry into the sector are also quite high. Not only is there limited new supply in prime locations near good universities, city centres and transportation hubs, well-located land for developing new student housing is similarly constrained.

Investing in student housing also requires specialised revenue management systems quite distinct from operating other real estate, owing to the complicated leasing dynamics.

This may explain why Singapore's cross-border investment volume in student housing has not been the most stable, surging multi-fold from a mere US$53.7 million in 2015 to S$3.3 billion in 2016.

Petra Blazkova, senior director of analytics at Real Capital Analytics, said this is because most investors are still novices to the sector, hence the investment volume can be volatile. "The dynamics remain the same; it's just that the transactions could be rare to find."

READ MORE: GIC JV buys student-housing portfolios in US for US$1.6b