No room at the...uni07 November 2017
It is widely known in the higher education sector that the shortage of student accommodation in Australia is a major issue for all universities—in capital cities and regionally. This acute shortage of accommodation significantly impacts attracting and keeping international students as well as the broader rental market. The gap in the market has created opportunities for developers and financiers who have traditionally been involved in the social infrastructure public-private partnership (PPP) space.
The Jones Lang Lasalle report on student accommodation in Australia published in November 2016 (JLL 2016 Report) notes that while there has been an increase in supply of purpose built student accommodation (PBSA) in most major capital cities, the demand continues to outrun it. Much of the new PBSA in capital and regional cities has been supplied by transactions involving property developers and infrastructure financiers.
If it looks like PPP...
There are currently a number of transactions in the PBSA market that bear similar characteristics to social PPP transactions. Transactions, such as the recent PBSA built at the Australian National University, are analogous to the public housing PPPs that have been refined and sophisticated in the United Kingdom (UK) for decades, and led to social housing developers and investors in the UK moving into the PBSA market (for example, Balfour Beatty and Laing O'Rourke). The similarities between the Australian PBSA market and transactions undertaken in places like the UK, enhance the bankability of these projects for Australian investors in economic and social infrastructure such as Macquarie Capital, Capella, John Laing, AMP Capital and Plenary.
Further, the use of these PPP-like structures opens the door to international investors such as the British student accommodation company, GSA Group. In 2016, the GSA Group made its first Australian acquisition and continues to have a solid development pipeline, including a site near the University of Melbourne. A growing list of offshore funds and real estate investment trusts (REIT's) are responding to the supply and demand imbalance in student accommodation. This includes entities like Balfour Beatty from the UK, which leads the Learning + Living consortium and Redefine Properties, and a South African REIT who owns a controlling stake in South Africa's Respublica Student Accommodation, which is investing in PBSA in Australia through this entity.
How these transactions are structured
Like a UK social housing project, PBSA projects generally involve an upfront fee paid by the special purpose vehicle project company to the university. In return for the upfront payment, the project company receives, amongst other things, the rental income paid by the students over the life of the concession. The life of the concession varies from project to project but is generally around 30 to 40 years. Along with constructing the PBSA, the project company usually undertakes and receives income from the university for providing facilities management services at the new residences. Where there is an existing PBSA, the facilities management arrangement may include maintaining the existing, as well as the new, residences. The recent Pendleton Social Housing Project—one of the first to reach financial close following the Global Financial Crisis (GFC)—required the project consortium to deliver 1,600 new homes and refurbish 1,200 existing homes via a hybrid PPP model. In addition to the refurbishment requirements, the consortium was required to provide facilities maintenance services.
There's a lot to be learnt in the Australian PBSA market from projects of this nature. As previously mentioned, the Pendleton Social Housing Project was the first of its kind to be delivered post–GFC and required the financiers to think outside the box to obtain the requisite funding. It was unique in its funding method, using a non-monoline wrapped bond with a subordinated "first loss" tranche, providing the credit enhancement to the project instead of the wrap. The 30-year project secured £82.6 million of funding through the first unwrapped two-tranche listed bond structure for a new project.
In a PBSA transaction there is no direct support provided by state or Commonwealth governments as there is for other social infrastructure PPPs. A PBSA transaction is more of a hybrid PPP and, therefore, similar to a UK social housing PPP because one of its key drivers is the financial standing of the university involved. Other key considerations for investors include:
- a university's ability to attract students
- the location of the university (i.e. major capital city or regional town)
- the reputation and worldwide standing or ranking of the university, and
- the demand for accommodation at that university.
Unless a university can show that levels of demand for student accommodation at its facility continue to outstrip supply, it will be very difficult to run a successful tender process with maximum bidders, providing the best outcome for the university.
Where to from here?
As PBSA demand continues to outstrip supply, there will continue to be opportunities for building and maintaining PBSA by local and international infrastructure developers and investors. As the industry develops and becomes more sophisticated, we can expect to see more creative ways to finance these projects and more overseas players taking advantage of the situation in Australia.