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Student accommodation prized for defensive play in uncertain economy

Sector is good opportunity for investors to diversify out of their home markets: analysts

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SPH's Student Castle is a premium brand aimed to capture students looking for high quality accommodation.

Singapore

INVESTMENT in purpose-built student accommodation (PBSA) has been growing; and notwithstanding the challenging market conditions, it is still considered an attractive defensive asset class, according to analysts and industry players.

Global investment into the PBSA sector for the fourth quarter of 2019 topped US$7.6 billion, more than double that of the same period in 2018, according to data from Knight Frank. As at March 2020, the sector had seen some US$7.8 billion worth of investments, with volumes expected to surpass that of previous years.

"The search for relatively low risk investments with good returns is drawing more investors to the sector," said Knight Frank Asia-Pacific capital markets director Emily Relf.

Investors based in the Asia-Pacific who are "heavily weighted in traditional asset classes" also see the sector as a good opportunity to diversify out of their home markets, added Ms Relf.

Other factors that contribute to the attractiveness of PBSA as a longer-term investment strategy include demographic drivers such as a steady growth of international student mobility, according to Rohit Hemnani, chief operating officer and head of alternatives capital markets in the Asia-Pacific in JLL.

International students are attracted to mature markets such as Australia, the US and Britain for the reputable educational institutions and employment opportunities after graduation, said Mr Hemnani.

Far East Orchard's group chief executive officer Alan Tang shared similar sentiments, saying that demand for PBSA in the UK will remain strong given the "established reputation of the UK higher education system".

The group has 11 properties in the UK that are part of its property investment portfolio. Its property investment segment, which also includes medical suites and commercial units in Singapore, accounts for 18 per cent of its revenue for financial year 2019. (see amendment note)

Mr Tang pointed out that the PBSA asset class in the UK has demonstrated "counter-cyclical qualities with continued rental growth".

But as the sector garners more investor interest, increased valuations and compressed yields pose some challenge to investors. Of immediate concern is the impact of the Covid-19 outbreak on the PBSA business.

Housing demand and occupancy are likely to take a hit from current travel bans and restrictions, according to CGS-CIMB analyst Ngoh Yi Sin.

This comes as Singapore universities temporarily halt overseas student exchange and internship programmes. Numerous other universities around the world have instituted similar measures. Despite that, Ms Ngoh believes that the asset class is still considered relatively resilient to economic uncertainty, as students can be expected to return to school once the situation normalises.

But others were more pessimistic, given that the Covid-19 outbreak which started in Wuhan, China has since spread to become a global pandemic. RHB Securities analyst Lee Cai Ling said that the PBSA sector cannot be considered defensive at the moment as it is still "difficult to determine the extent of the impact" of the virus outbreak.

Still, Ms Ngoh pointed out that companies can mitigate some of the impact by diversifying their student pool or taking the opportunity to enhance their assets.

Beyond the mature markets in Australia, Britain and the US, investors may want to look into Asia, which is fast becoming an attractive destination for PBSA investments.

This comes as Chinese institutions start to emerge in world university rankings, according to Knight Frank's Ms Relf. European investment into student property markets in the Asia-Pacific also doubled in 2018.

Centurion Corp, whose PBSA sector contributed some 34 per cent to the group's revenue for FY2019, has tapped into the Asia market through its acquisition of a property in South Korea in 2018. It also has a student accommodation property in Singapore.

JLL's Mr Hemnani also said that there will be opportunities to target new market segments in the coming years. "In short, opportunities will emerge via increased market differentiation . . . providing the scope for operators to target more specific sectors of the market, including both the affordable and higher end," he added.

Singapore Press Holdings, which publishes The Business Times, adopts a dual-brand strategy to cater to different groups. Student Castle is a premium brand aimed to capture students that look for "high quality accommodation" while the SPH-established Capitol Students brand targets the growing UK domestic student segment "with a focus on functionality and value", according to an SPH spokesman.

While attractive, it is no easy feat managing such an "operationally intensive" asset class. Often, it boils down to selecting the right operating partners that have "strong links to universities and the ability to provide quality, safe and secure accommodation", said Mr Hemnani.

Both SPH and Centurion make use of in-house and third party resources to manage their PBSA assets while Far East Orchard and Wee Hur Holdings' properties are managed by third-party operators.

Centurion chief executive officer Kong Chee Min prefers to manage the group's assets internally. "We believe hands-on, direct management enables us to achieve better operational outcomes and more efficiently maintain or enhance our assets," he said.

There is no one-size-fit-all approach when it comes to running PBSA, and the choice is largely dependent on the growth strategy of the investing company, noted market watchers.

Said Natalie Ong, research analyst, at Phillip Securities: "It is not uncommon for the operations to be outsourced in the early years of the investments while the company tries to build their local expertise and talent."

Amendment note: An earlier version of this article incorrectly stated that the group's PBSA business accounts for 18 per cent of its FY19 revenue. It is in fact its property investment segment, which comprises its PBSA business, medical suites and commercial units that accounts for 18 per cent of the group's FY19 revenue.