stephen so - kpmgc- investing in student housing market

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


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


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


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


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


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


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


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


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


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


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


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


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


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

[email protected]

mailto:[email protected]�

© 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.

stephen so - kpmgc- investing in student housing market

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