Australia’s universities are keen to improve their accommodation options for students but at the same time are looking to fund research facilities and other capital projects. When Ashurst worked with the University of Wollongong in late 2014 to monetise new and existing accommodation through an innovative public-private partnership, it was clear there was a potential win-win for universities across the board. 12 months on, deal flow is increasing as other universities examine ways of monetising their revenue streams.
When the University of Wollongong (UOW) pulled off a groundbreaking circa $250 million public private partnership (PPP) in late 2014, the market took note. Here was a public university joining forces with private investors to expand and upgrade its student accommodation and – more remarkable still – to extract value from its student accommodation assets.
The university granted a long-term licence of its entire student accommodation portfolio to the Living + Learning Partners consortium (comprising UK based Balfour Beatty with HRL Morrison & Co) in exchange for a substantial funding injection to be used to invest in UOW’s teaching and research endeavours. Living + Learning Partners will also fund the new build elements of the deal.
Until now, student accommodation has not been typically viewed as a profitable venture among Australia’s universities. “Traditionally, it is not seen as a core business. They have never made any real money out of it,” says Ashurst Finance Partner Ken Nguyen.
This is set to change. “Since the UOW deal, universities have realised they can get the private sector in to build and/or maintain the accommodation, while at the same time raising money off the back of the student revenue.”
The subsequent wave of activity over the past 12 months has been marked.
“There’s more of a propensity to monetise assets and use that to acquire or develop more assets than to simply borrow.”
Jamie Ng, Ashurst Finance Partner
Grand ambitions
Ready cash for badly needed research facilities and other capital projects is not the only incentive for universities just now. Many are intent on expanding internationally. This makes accommodation a priority since international students tend to live on campus and often prefer higher-end accommodation. As a result, there is considerable interest in building more accommodation and in upgrading or refurbishing existing facilities.
A number of the wealthier universities can afford to do this without recourse to finance. However, those that can’t are also keen to avoid stockpiling debt. “Monetising assets goes hand in hand with universities’ general reluctance to incur significant amounts of debt,” says Ashurst Finance Partner Jamie Ng. “There’s more of a propensity to monetise assets and use that to acquire or develop more assets than to simply borrow.”
Different drivers
Despite a general move by universities to tap the private sector for funds, the resulting deals vary considerably in size and structure. This is driven by a myriad of factors such as their financial position and sophistication, their credit worthiness and their location and accommodation needs.
“We’re working with some Universities which have high occupation rates, are very campus focused, have higher than normal international numbers and are looking to expand,” says Ashurst Infrastructure Partner Harvey Weaver. “That’s quite a different proposition to a university that is largely urban-based and faces a lot more competition from the local market.”
UOW’s transaction was influenced by different considerations again. While some institutions are content to transfer all the risk and revenue to the private sector, UOW was keen to maintain its connection to the students and, hence, ultimate control over its accommodation. “UOW has retained responsibility for the day-to-day operation of the student accommodation, including the nine existing facilities, plus the new components to be constructed, while outsourcing a lot of the hard facilities management tasks” says Weaver. “The structure of each deal really depends on the drivers behind it.”
“It means there’s likely to be more emphasis on how universities market themselves in the future, something which the universities themselves are increasingly recognising as a key growth driver.”
Harvey Weaver, Ashurst Infrastructure Partner
Wooing investors
One important factor in any given transaction is a university’s historic levels of occupation. This can affect both the size and structure of the deal. While some universities boast very high levels of occupation, others have lower occupancy which impact the potential revenue stream. “Then investors get a little bit nervous and may seek other forms of occupancy support from a university,” says Ashurst Infrastructure Counsel Rob White.
Options may include the university underwriting student occupancy rates, guaranteeing accommodation to certain student groups or restricting the university’s ability to build new and competing student accommodation. “The requirement for occupancy support will likely depend on past student occupancy levels, the robustness of occupancy forecasts and ultimately whether the university can demonstrate that occupancy support is not required” explains White.
The long-term nature of PPP deals, sometimes 30 years or more, also means investors are more likely to favour a university with a solid name and strong story. “They will consider the reputation of the university, its ability and plans for expansion, as well as attractiveness to international students,” says Weaver. “It means there’s likely to be more emphasis on how universities market themselves in the future, something which the universities themselves are increasingly recognising as a key growth driver.”
Doing the groundwork
Clearly, detailed preparation is essential to pulling off a successful deal. “Universities need to put in the necessary time and effort,” stresses White. “Above all they need to be prepared.” That includes seeking advice from the very beginning. “It is important that a university first works out whether it has a deal that will be attractive to the market and meets its own objectives” says White.
In particular, universities should ensure their deals are sensibly structured, adds Weaver. “It’s a matter of universities being realistic. If you’re a smaller university going for a mega deal it’s likely to be challenging to get away, which in turn affects longer term credibility.”
Managing taxation issues associated with the deal is also vital. While universities benefit from a range of direct and indirect tax exemptions, the taxation requirements of investors, particularly international investors, can add a layer of complexity. Peter McCullough, Tax partner at Ashurst says: “An accurate assessment of the likely tax profile is an important element of the deal structure and, in some situations, investors may prefer to obtain tax rulings from the ATO”.
Traditional development financings
Of course, not all universities or colleges are keen to pursue a PPP. “There might be individual colleges that are affiliated or associated with a university that might go for a more traditional debt development financing package,” says Ashurst Finance partner Ken Nguyen.
For financiers, the credit rating of the university can be enough to get them comfortable with the residences involved in the project. However, financiers do need to prepare an exit strategy, warns Nguyen. “There’s often a limited – or no – ability for financiers to take security over and sell the underlying real property because that property is dedicated for a particular purpose, being student accommodation, and therefore has no independent land value. In the event of an enforcement scenario, financiers are limited to selling the access to cash flows made available through the development itself. Therefore, financiers need to ensure they have sufficient protections to, first, get the development to completion and, second, continue to be entitled to those cash flows.”
A new kind of PPP
Yet clearly there is considerable appetite for this emerging asset class. In a market keen for new deals, student accommodation is piquing the interest of both domestic and international investors alike. Many from overseas are comfortable with the asset class having gone down this route in such countries as the United Kingdom.
For pension funds and other long-term investors it offers a relatively stable, low risk alternative similar to other PPP deals. “It’s an offshoot of that market with similar risk profiles,” observes Ng. “But it’s quite nuanced as well.”
Adds Weaver: “It’s an interesting market but you do have to understand the key drivers. While there are also a lot of parallels with more vanilla PPP and property deals, there are critical differences. Appreciating those differences are knowing how to deal with them is key to understanding these deals.”
