When AMP Capital’s infrastructure equity team invested in a postgraduate college development at the University of NSW, it made a 12 percent return per annum for ten years.
That investment, now sold back to the college, is a perfect example of why student accommodation can be an attractive infrastructure asset class.
The key is having a strong demand story where you are contractually aligned with a university to attract students for the long term. Buying or developing assets without this is a very different risk profile. It can still be appealing, though more akin to property.
The key difference between an infrastructure asset and a property asset is the importance and security of the cash flows over other value drivers such as underlying freehold property values. Infrastructure investments with a low risk and return profile generally come with a very high confidence of the underlying cash flows and have significant contractual protections.
Student accommodation challenges this point because structuring the right deal and taking on an acceptable level of risk can deliver attractive returns. The return on AMP Capital’s combined student accommodation portfolio over the past 12 years was more than 16 per cent per annum, with yield of over 5 per cent during that time.
And the commerciality of this sector is getting stronger over time.
Australia’s international student numbers reached a record high last year, creating increased demand for purpose-built student accommodation. Tertiary education is Australia’s third largest export industry with over 1,000,000 students currently enrolled, according to data by Savills.
Student numbers increased steadily through the 2000s then went through a boom in 2010 when the federal government removed regulations that capped university places. The fees universities can charge domestic students remain regulated, so many target increases to their international student numbers as a way to improve their bottom lines.
At the same time, as student numbers have risen, development of new accommodation has failed to keep pace. Australian universities currently have beds for 10-15 per cent of their students across the major cities (with the exception of Canberra at 30 per cent) compared with above 30 per cent for cities in the UK, according to Savills.
Universities need sufficient stock of quality student accommodation to meet demand, or their enrolments may suffer. The financial strength and priorities of a number of universities have led some to fund and develop student accommodation by themselves. In the meantime, some have opted for partnerships with private funding to solve this shortfall and others have been prepared to let the market respond independently to this supply imbalance.
Despite the supply-demand equation being favourable, AMP Capital requires certain conditions be met before it will invest.
To make a compelling investment story for us, student accommodation needs to meet hurdles around size, occupancy, partnership arrangements with universities, and capital outlay.
AMP Capital’s cornerstone student accommodation is Sydney University Village on campus at one of Australia’s top-ranked universities. The 650-bed facility offers accommodation ranging from one-bedroom studios to five-bedroom apartments with two bathrooms.
The University of Sydney owns the land and the investment – 88 percent owned by AMP Capital clients – is via a 40-year concession in an arrangement similar to that of a Public Private Partnership.
“The village has been full for the 14 years it’s been open and has been one of AMP Capital Infrastructure Equity’s best-performing businesses that is managed on behalf of a large number of Australian superannuation funds."
In a snapshot, the initial investment was close to $50 million and took three years to build. It houses 650 students per year, who pay between $318 per week for a bedroom in a shared apartment and $435 per week for a studio apartment with a kitchenette. The village includes a conferencing business, a laundrette and café. Residents live on-campus in fully-furnished rooms only two streets away from the heart of Newtown in Sydney’s inner west.
Long-term planning and the provisioning of maintenance is essential in maintaining the village to a high standard so that students have appropriate IT, common areas and greenspace. Periodic large capital upgrades can detract from short-term returns but are essential in keeping the facility contemporary and continuing to be attractive to students for the long term.
Over the last few years we’ve outlaid $2.5 million in installing kitchenettes, upgrading WiFi, providing a new fit-out to the communal social areas, and we’ve even built an undercover barbeque. It’s all part of making sure this an asset where students want to be. It’s all part of making this a place where students want to live during a crucial stage of their academic lives. The asset’s yield is in a range 4 per cent to 6 per cent.
Having a good operator and working closely and transparently with your partners is key in finding a fair way through the day-to-day activities that are unique to university accommodation.
On reflection, 14 years in, I’d like to think that residents, investors, management and the university would all feel it’s been a good venture.
When a university decides to involve a new partner in something as important as the daily lives of its students, it’s critical that that trust is repaid with safe hands.
AMP Capital is experienced at managing these kinds of environments and has a reputation as a long-term infrastructure manager with over 13 social infrastructure assets, both qualities that universities look for in a partnership.
Going forward, we are certainly looking to increase investments in this space. We have the appetite and are actively looking to buy or develop more of these kinds of sites.
As part of our investment criteria, AMP Capital performs significant diligence to ensure there is sufficient demand for new beds, and even then, to make a project viable it looks for projects of at least 500 beds, which equates to roughly a $50 million spend.
The partnership with a university is key.
They want to trust that the investor will continue to be the right investor for a long time. The delivery of education and lifestyle factors are certain to evolve over the years, such as the introduction of WiFi, and that relationship needs to be able to transcend rigid contracts to be able to adapt to change.
Understanding exactly what to build is critical, too. The AMP Capital experience has been that domestic regional students have a preference for economical smaller bedrooms with shared bathrooms and larger living spaces. International students have a preference for independent studio living but appreciate facilitated social activities. Postgraduate students prefer quiet study spaces and value the ability to share accommodation with partners and families.
Most importantly, all want to be close to university and want it as cheap as possible.
Return Vs risk
The industry is not without risks though. The increasing supply of university accommodation also requires a belief that demand will continue to grow and that the government will continue to regulate university fees while numbers of university places remain uncapped. Various attempts at deregulating the industry has been proposed and voted down over the last three years.
Australia is currently one of the most popular education destinations in the world, with one in five tertiary students coming from overseas, according to the Australian Bureau of Statistics.
The biggest increase in international demand for Australian university places has come from an increasingly financial, large and mobile Asian population demand base, who are more able than ever to choose where in the world they want to study. Australian universities are not only high on world ranking lists but favourable visa conditions combined with a safe and attractive lifestyle is driving significant demand from international students.
You need to believe the international student growth story. You need to take a view on possible changes to federal regulation, you need thorough diligence on why students will choose your facility and what the risks to that are. You need an active and flexible management approach to deal with changes that are inevitable in this sector.
AMP Capital’s investments in student accommodation have fallen squarely on the infrastructure equity side of the ledger with a focus on fixed term cash flows and strong partnerships with universities rather than exposure to freehold land and residual property values.
Either structure of investment can have its merits; understanding what is driving returns and where the risks are, like any investment, is fundamental to having success in this sector and complementing other assets in a well-diversified Infrastructure portfolio.
The demand growth story combined with a shortfall in supply creates a compelling investment thesis for investors.
Important note: While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided.