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Stephen So - KPMGc- Investing in student housing market
 

Stephen So - KPMGc- Investing in student housing market

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Stephen So delivered the presentation at 2014 Student Housing Forum. ...

Stephen So delivered the presentation at 2014 Student Housing Forum.

The 5th annual Student Housing Forum brought together university planners and managers with designers and student accommodation experts to look at the ways in which universities can provide distinctive, affordable, secure, supportive and inclusive campus living. It examined the features that distinguish best practice, considers the challenges for supply and affordability and beyond that explores the ways in which student accommodation goes beyond a residence to an environment that offers the best campus experience.

For more information about the event, please visit: http://www.informa.com.au/studenthousing14

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    Stephen So - KPMGc- Investing in student housing market Stephen So - KPMGc- Investing in student housing market Presentation Transcript

    • 5th Annual Student Housing Forum Investing in student housing market CORPORATE FINANCE 11 June 2014 kpmg.com.au
    • 1© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. KPMG Corporate Finance  KPMG is one of the ‘Big 4’ international accounting & advisory firms  Clients in this sector include of large institutions such as universities, all levels of government, and corporate clients  Corporate Finance practice group provides commercial and financial advice  Deal structures tailored to specific client requirements  Advise in commercial negotiations when dealing with experienced counterparties  Develop business cases and undertake financial analysis  Other services – PPP advice & management, M&A, debt & capital advisory, transactions services  Extensive expertise in the sector  eg. Advised a university on best structures to meet requirements for more student accommodation given constraints, particularly around credit rating and capital funding  Acted on commercial / financial advice on many transactions
    • 2© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Student Accommodation (from an investment perspective)  What is student accommodation? 1. Hostels and homestays Short term 2. Private residences Hard for students to access unless in share situations, otherwise highly competitive, unfurnished, utilities charged on top of rent 3. University affiliated accommodation Halls of residence, university apartments, colleges, and 4. Purpose built private residences Began in earnest 1990’s, now over 50% in total beds in investment space  Focus on last two types for purposes of investment
    • 3© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Characteristics  Growing and recognised asset class  US and UK  Research suggests 10 years ahead of Australia  Attract increasing amounts of institutional capital  USD 7.2bn in worldwide investment in 2013 (Savills)  Australia  Seeing institutional capital and players starting to enter the market  eg. Iglu with backing from a JV between Macquarie Capital and Singapore government’s GIC fund  eg. Urbanest presence  Hybrid between hotel and residential, having hotel like services
    • 4© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Characteristics cont.  Residential exposure and with higher densities  Smaller rooms but partly offset by student specific amenities  Requires operational expertise – management intensive  Growth component with defensive nature – counter cyclical  Specialised product  Typical issue is relative size of units are unattractive other potential purchasers  Sale can be more difficult because smaller pool of potential purchasers  Bank finance for retail purchases available but usually at lower LVRs than residential  Initially university dominated, now growing share of beds controlled by specialised private developers and operators groups  eg. Campus Living Villages, Unilodge, Iglu, Urbanest, Student Housing Australia
    • 5© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Key Drivers  Increasing numbers of international students  Represents 60% of demand for student accommodation in Australia  Significant growth since early 2000’s plateaued recently because factors including the GFC and the high AUD  Demand from universities and higher education  1.32m students enrolled in 2012-2013, nearly 15% international students  High AUD  Increasing cost to study relative our major education competitors eg. US, UK  Population aged between 18 to 25  Continued high Australian population growth
    • 6© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Types of Investment  Direct Investment  Direct let – investor owns and operates asset eg. Iglu  PPP agreement  Operator develops and operates asset, asset retained by owner or transfers after an agreed period eg. Campus Living Villages  Lease – investor owns asset but leases it to an operator eg. Unilodge  Indirect  Private syndicates – single development  REITs – US, not so far in UK or Australia  Property funds – usually multi asset, eg. CLV fund  Company shares
    • 7© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Return Expectations  Core plus/value added investment  Higher returns to compensate for operating risk  Yield in Australia in the range of 7-8%  Dependent on quality of asset eg. proximity to education facilities, professionalism and sophistication of operator, purpose built, continued low vacancy in private rental market  US - Increased interest from institutions have placed downwards pressure on yields, which range between 6-7.5% (Knight Frank)  UK - 4.75% (Prime London, long term lease to operator) to 7.25% (secondary regional, direct let) (JLL)  Historically lower capital growth than residential  Specialised nature results in smaller pool of purchasers  Greater relative difficulty in obtaining funding from banks  Potential for capital growth based on rental growth above costs
    • 8© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Debt & Equity  Debt  Banks assessing similar to hotels  Some appetite but treated on a case-by-case basis, with sponsor relationship and track record highly important  LVR 65%  Cost of funds  Development – 2.5% to 3% margin on BBSY  Post Construction – 1.5% to 2% margin on BBSY  Equity  Some activity from institutional investors, however most active in market are owner operators eg. CLV, Unilodge
    • 9© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Future Investment Considerations  Online education  Massive Open Online Courses (MOOC)  Impact of Government financial imperatives  National Rental Affordability Scheme (NRAS) discontinued  Potential lower student demand for higher education because of higher fees and costs  Deregulated uni fees from 2016, higher indexation on student loans, lower repayment threshold for HELP loans  Higher education funding constraints  Mitigated in part by use of PPP and other project finance structures by university  Gap in market for private developers and operators
    • 10© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Case Study – University Seeks To Deliver On Campus Student Accommodation  University A (“UA”) is a non Victorian tertiary institution  KPMG engaged to determine alternative corporate structures to deliver student accommodation  Issues 1. UA sought to fund the development of a significant number of beds 1. Pre GFC, used a Build Operate Own Transfer (BOOTs) PPP/project finance arrangement to meet accommodation requirements.  Post GFC, debt costs higher and covenants more onerous, so PPP much harder to finance  eg. First hand in infrastructure deals undertaken by KPMG’s Infrastructure & Projects Group 3. UA was near its debt ceiling and wished to maintain its current credit rating 4. UA also strategically wished to limit exposure to property and development risk  Long term strategy to focus on delivery of education services
    • 11© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Orange = Medium or neutral in terms of achieving UA’s objectives Case Study – Key Drivers & Issues # Drivers Issues 1. Strategy •Non Core 2. Balance Sheet Capacity •Debt Ceiling Cap •A+ Credit Rating •Alternative Inv. 3. Risk Management •Volume Risk •Property Risk •Delivery Model •Maintenance Risk 4. Funding & or Monetisation •Debt Source •Exit Strategy •Securitisation •Pricing 5. Delivery Program Obligations •NRAS Timing 6. Ease of Implementation •Capacity & Costs •Market appetite Green = High or positive in achieving UA’s objectives
    • 12© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Case Study  Potential Solutions We reviewed and tested solutions against the university's needs and how the market would respond. 1. Direct ownership of accommodation assets UA develops assets, however would breach debt ceiling in the absence of a sale of some existing accommodation assets 2. Direct ownership of accommodation assets, raise debt ceiling Negative impact on credit rating 3. Create a Special Purpose Vehicle (SPV) to develop assets, UA retain majority (> 50%) interest SPV consolidated on UA balance sheet impacting debt levels, but retain control of accommodation outcome 4. Create a Special Purpose Vehicle (SPV) to develop assets, retain minority (< 50%) interest Not consolidated on balance sheet, confirm required levels of control 5. 100% selldown of SPV or direct ownership assets – consistent with long term strategy
    • 13© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Case Study – Strategic Scenarios UA Strategic Options Utilise freed up balance sheet capacity Enter into other commercial arrangements to monetise assets or income streams Realise value / cash by monetising assets and income streams Potential Tactical Options Maintain Control (UA 50%+) Raise debt ceiling Sell down part or all student accommodation assets Monetise Control (UA <50%) UA’s options are dictated by the level of control and risk it wishes to retain, as well as the markets acceptance of an alternative model, being debt and equity providers. Objective Structure SPV Trust Structure - <50% UA ownership Benefits ■ Maintains tax exempt status ■ Maintains asset control ■ Flexibility to sell down positions once development risks removed and occupancy and net income streams confirmed – reduces property and volume risk ■ Influence maintenance outcome ■ Scope to reduce volume risks depending on type of commercial arrangement and SPV ■ Greater leverage capacity of UA’s Balance Sheet ■ Scope to build long term property holding asset structure Direct Ownership Sell 100% of Assets Direct Ownership or SPV Trust Structure Develop, prove operations and monetise ■ Best recognition and support of non core strategy
    • 14© 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International. Liability limited by a scheme approved under Professional Standards Legislation. Questions & Contact Details Stephen So Senior Executive, Real Estate Advisory Services, Corporate Finance KPMG 147 Collins Street Melbourne VIC 3000 Australia Tel +61 3 9288 6140 Fax +61 3 9288 6666 Mob +61 412 027 155 sso1@kpmg.com.au
    • © 2014 KPMG, an Australian partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.