Far East Orchard looks to student accommodation to build safe haven

Singapore

KING's Square Studio sits opposite a graffiti-strewn wall in Bristol, UK. Clad in dusty red, the Georgian-styled building is unremarkable to passers-by. But to real estate firm Far East Orchard (FEOR), the 301-bed student accommodation property represents a safer, more stable home for investors' money.

This brick, glass and panelled block - which cost the company £39.3 million (S$70.5 million) - is the latest addition to a portfolio of 12 student residences located near British universities. FEOR's portfolio now has 3,500 bedrooms across six cities in the United Kingdom. The company plans to have around 5,000 beds by the end of 2025, chief executive Alan Tang told The Business Times.

Building up its purpose-built student accommodation (PBSA) portfolio is a key part of the hotel operator and property developer's strategy to generate sustainable, recurring income, said Mr Tang.

He hopes to offer shareholders a more stable dividend payout by diversifying beyond property development - which tends to produce "lumpy" earnings. Property development contributed 1 per cent of FEOR's 2019 operating profit. Mr Tang said FEOR does not have any new projects in the pipeline.

The pandemic has weighed on hospitality-focused businesses like FEOR's. The mainboard-listed company, a subsidiary of Far East Organization, reported a net loss of S$6.3 million for the nine months ended Sept 30, compared with a net profit of S$5.4 million in the year-ago period.

Sales declined 25.1 per cent, to S$84 million from S$112.1 million.

Mr Tang said: "Because of Covid-19, the hospitality front will naturally take a while to repair and recover, and this puts PBSA up very nicely as a diversifier . . . Considering that our PBSA portfolio is not very big at this point in time, we could grow it more meaningfully in the next few years."

Its PBSA portfolio had an occupancy rate of over 80 per cent, despite some early cancellations of tenancies due to the pandemic. Occupancy was previously over 90 per cent.

Building a PBSA portfolio

Mr Tang said FEOR's investment strategy is all about "location, location and location".

For instance, King's Square Studio is a 13-minute walk from one of Bristol's top universities, and is also within walking distance of the city centre.

The company is on the hunt for similar properties with "good demand and supply fundamentals", he added.

"Most of these universities we look at have a focus on research and a reputation for academic achievement, like those in the Russell Group."

Alongside the United States' Ivy League schools, the UK's leading 24 universities, known as the Russell Group, dominate global rankings.

Competition is tough. In Bristol, for instance more than 15 student accommodation buildings surround the top university.

But Mr Tang said demand is expected to remain strong, pointing to the record number of applicants and acceptances for the 2020/2021 academic year. He is confident that the firm has a "strong foothold" and "deep understanding of the market to leverage on", considering that FEOR has been in the PBSA scene for more than five years.

The boom in the PBSA market has been underpinned by the sheer number of students at UK higher education institutions. According to a report by real estate services firm Cushman and Wakefield, there were 1.84 million full-time students at UK universities in 2017/2018, a 10 per cent increase from the previous year. Around 60 per cent or 1.1 million students were studying outside their home region.

Full-time student numbers outweigh current PBSA bed spaces by a ratio of three to one, according to a Knight Frank report.

Mr Tang said FEOR's "healthy cash balance" of S$276.1 million as at end-September would allow it to pursue acquisitions and development opportunities "well within (its) means".

FEOR did not disclose its liabilities as at end-September. As at end-June, its total borrowings and debt securities stood at S$563.1 million while its cash balance was S$262.1 million.

Mr Tang said he watches the debt-to-equity ratio and intends to keep this below 0.6. As at end-June, FEOR's debt-to-equity ratio was 0.462.

FEOR is "standing ready" for opportunities, such as distressed assets with good fundamentals, that might surface in the next 18 months.

"Going forward, the interest rate regime is probably going to be in the low territory for a while, and it bodes well for us to deploy capital when they are attractive assets," he added.

Growth in hospitality

FEOR also intends to expand its hospitality business, targeting to manage over 25,000 rooms by 2025. It currently has over 16,000 rooms in 100 properties across eight countries, with a pipeline of 2,800 more rooms over the next three years.

Countries where it hopes to expand include Japan, Indonesia, Vietnam, Australia and Germany, which have sizable domestic markets.

"For these countries, there will be some support (from the domestic market) to sustain some level of business," said Mr Tang. "It might not be as high, but it wouldn't come to a situation like the one we have in Singapore now."