Investors ponder murky outlook for student housing assets
Until Covid-19 struck, asset owners across the world had been looking at student accommodation investments as one of the niche asset class that could help offer them higher yields.
The pandemic has put paid to a lot of those efforts. The need of education institutions to shut their doors under global lockdowns and increasingly resort to online classes has caused the associated demand for student housing to badly suffer.
However, the troubled current conditions for student accommodation as an asset class has not prevented some adventurous investors with long investment horizons from venturing into it.
On June 29 the National Pension Service of Korea (NPS) and German insurer Allianz recently forged a tie-up to launch Asia’s largest closed-end fund for diversified core real estate. Student housing assets were among the sub-sectors of the fund, which is looking to offer typical returns of 7% to 10% annually.
The rationale is simple: while the coronavirus has caused a demand shock and diminished prospects of good returns this year, it would be unfair to conclude that student accommodation has become outright risky.
The sub-sector has gathered traction over the past three years. According to student-housing research firm Bonard, about 500 companies were involved in the asset class globally in 2017. The figure has since grown to close to 700, some of which are backed by institutions including Allianz, APG and AXA, IPE Real Assets reported.
TROUBLE INVESTING TIMES
Real estate, long a favourite alternative asset class for many institutional investors, has generally become a far more troubled area of investment as a result of Covid-19. Asia Pacific commercial property investment volumes, for example, fell 25% in the first quarter of this year to $22 billion, according to data from CBRE.
A Hong Kong-based insurance investment executive told AsianInvestor that student housing was one of the many property areas to suffer amid the impact of the pandemic.
“Student accommodation was a big sector that we looked at [half a year ago] but Covid is redefining how people educate themselves … I have to keep an eye on [that sector],” added Kenneth Ho, Hong Kong-based managing partner of the $3 billion multi-family office Carret Private Capital.
Despite this, some real estate fund managers say the investment prospects in the sub-asset class are not entirely bleak. The key to whether funds or co-investments into the asset class can continue to offer a steady income flow lies partly in the way they are held, said Suchad Chiaranussati, chairman of Singapore-based real estate fund manager SC Capital Partners.
“Currently, our student accommodation assets have not been significantly impacted by the virus because our master lessees are the first line of defence,” he told AsianInvestor.
He noted that his firm’s $755 million open-ended core-plus fund invests in student housing, which it then largely master-leases the assets to an operator, rather than running the properties itself.
"Most of our student accommodation assets are master leased to an operator or university... and they are basically locked in to pay us some rent," he said.
The fund also has some geographic diversification; it has invested into student accommodation in Japan, Australia and New Zealand. Together these assets represent 18% of the fund’s total portfolio value.
One recent example of a new investment was when SC Capital Partners's fund signed a 20-year master lease Sydney-based university offering foundation courses in Australia. The fund looks out for investments that can help it reach its annual distribution yield of 4.5% to 5%.
The real estate asset class as a whole has also benefited in part from some governments being willing to help out tenants and managers, as part of pandemic assistance packages.
In Singapore, for example, the local government has compensated the manager in the form of tax rebates when the country-wide lockdowns began. In Australia, the authorities called for banks to reduce interest rates or to offer a loan repayment holiday.
LESS ADVENTURISM
But this only goes so far. Suchad is realistic about the impact of the pandemic.
“Of course, they [student accommodations' operators] can only withstand so much for a certain period of time. If this thing is to go on for five, 10 years, then they will not have the ability to withstand that and will probably ask us for rent reduction or some form of assistance.”
Even assertive investors in the student accommodation space have had to retreat from particularly risky investments since the coronavirus spread throughout the globe. Suchad said he expected asset owners will not look to buy into properties that are still under development or have slightly longer investment horizons.
Ho added that any sort of property investment that is related to tourism and hotels is “toxic”.
“If you look at the second quarter, third quarter and the end of this year, I don't expect to see many funds raising substantial amounts of capital, partly because travelling has been interrupted,” Suchad said. Instead, his firm’s local Australia team is able to meet with domestic asset owners and showing them some of the assets its fund already has in the portfolio.
The unnamed insurance executive predicted that it will likely take two quarters for the real estate asset class as a whole to recover.