The rite of passage of leaving home to go to university has a prominent place in the popular consciousness, due in no small part to the penetration of American stereotypes into our own cultural imagination. The reality in Australia hasn’t traditionally lived up to this, with only 17% of Australian domestic tertiary students moving away from their home town to study1, but that situation is changing at a rapid pace, having increased by over a quarter in the last five years.
All of these students need beds, and given the price and availability of rental accommodation in capital cities, a large portion of that burden is likely to fall on the supply of purpose-built student accommodation (PBSA), already stretched from a decade-long boom in international student enrolments. According to Brad Williams, Portfolio Manager for AMP Capital’s Diversified Infrastructure Trust, perceptive investors are taking notice.
“Demand for university places in Australia has been booming since 2010, when the Federal Government lifted caps on university places, but left the caps on fees in place.
“This policy incentivised the universities to expand their student numbers wherever they were able to find a profit margin.
“Recent changes in regulation that limit growth in domestic numbers have placed an emphasis on the international market.
“The result has been an intense contest for share of the student market, and universities understand the need to invest in high-quality, affordable student accommodation in order to remain competitive.”
Investment opportunities in PBSA are being driven by long-term trends of increasing demand and constrained supply, not least of which is the upward mobility of the Asian middle classes for whom an Australian education is highly desirable. These dynamics offer an opportunity for defensive positioning in an uncertain global environment, especially if they can be captured in a way which reduces risks in other areas.
Property or infrastructure?
At face value, student accommodation would seem to be a simple property play, and investors often treat it in this fashion, with a third party unrelated to the university buying or developing property close to campus and marketing it to all students, often across multiple campuses or universities. This model operates in a manner more similar to a long-stay hotel, and in Australia its appeal has been largely limited to international students. Without the security of a contracted relationship with the university, it is also exposed to the risk that the university may change its strategic direction or even open or expand their own competing supply. Finally, investments of this kind are more susceptible to regulatory risk around visa conditions and international student numbers, as well as fluctuations in currency and the domestic property market.
AMP Capital’s investments in PBSA are conducted differently, more akin to an infrastructure play such as a public-private partnership to build a road. We partner with universities to provide capital for student accommodation projects on campus without acquiring the freehold title. Instead, we obtain a concession to operate and maintain the facilities for a fixed period of time. Value in these investments is insulated from risks associated with domestic property prices, coming instead from secure, long-term cash flows with significant contractual protection, often superior to returns from otherwise comparable infrastructure investments.
For example, AMP Capital has recently acquired a concession for the Australian National University’s (ANU) student accommodation, the largest portfolio of PBSA in Australia, at over 4,000 beds. According to QS World University Rankings, ANU is the top university in Australia and has over 10,000 international students, representing 40% of the total student body2. The remaining 60% are domestic students, of which a high proportion relocate from interstate3. As a result, demand for accommodation outstrips supply and the ANU has recently commenced a further on-campus bed expansion.
The ANU investment, although acquired rather than developed, illustrates the core principles that guide AMP Capital’s approach to investment in PBSA:
- Long-term commitments
Our concession at ANU has a further 34 years to run, with contracted, CPI linked rent growth over that period, delivering stable, long-term cash flows. Holding responsibility for management of the facilities over that period means that we have direct control over the quality of the asset, allowing us to maintain its competitiveness in the market.
- On-campus location
On-campus accommodation is proving to be an enduringly popular model for both domestic and international students. Universities are able to not only offer student accommodation stock cheaper than off-campus alternatives by avoiding the cost of acquiring land, but they are also more attractive to students, particularly undergraduates, offering academic support, social activities and proximity to campus. ANU student accommodation occupancy rates have held consistently above 98% for the past five years.
- Quality institutions
Our partnership with ANU means that AMP Capital currently holds concessions at Australia’s three top-ranked universities (according to the QS World University Rankings). These institutions are likely to be highly resistant to any fluctuation in Australia’s university enrolments, remaining in vogue with both domestic and international students due to their superior reputation and rankings.
According to Mr Williams, the ANU partnership is not likely to be the last investment AMP Capital makes in this space, with future projects needing to meet requirements relating to size, occupancy, contractual guarantees and capital outlay.
He says that AMP Capital has been a welcome partner as universities look to expand their PBSA with collaborators that have a strong track record and demonstrated stability through the term of the contract.
According to research undertaken by Savills, over the past decade Australia’s eight capital cities have recorded compound annualised growth in full-time student numbers of 4.5%. International student demand has been even stronger - between 2012 and 2017 their total presence in Australia grew by 41%. Universities have been rushing to keep pace, but the scarcity of land close to campus is constraining new investment, with only 28,000 new beds in the pipeline in 2019, down from 35,000 in 20184.
Despite current investment into the sector, the research projects that there will still be 3.75 international students to every PBSA bed by 2022, which is very high by global standards and doesn’t even take into account local demand. If the growing trend for Australian students to move town to attend university is any indication, this supply imbalance is unlikely to be resolved at any point in the near future, and considered and committed investors stand to benefit.
1 Savills Research, Australian Student Accommodation – Q1 2019: Spotlight on Development, April 2019
2 Australian National University, Quick Stats
3 Henriques Gomes, L. (2018), ATAR no longer the only factor for year 12 applicants, ANU says, The New Daily, May 2018
4 Savills Research, Australian Student Accommodation – Q1 2019: Spotlight on Development, April 2019
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