Redefine has found properties in the right market, right location and right sector in Australia

By Thabang Mokopanele

SA’s second largest property group Redefine Properties has found properties in the right market, right location and right sector, according to Stanlib head of property funds Keillen Ndlovu.

The JSE listed group has acquired a new development site for student accommodation near Melbourne University, in Australia.

The 700-bed development, which will start in 2018, is expected to cost A$103.3-million, with Redefine’s share of the development cost set at A$93-million with 10% income yield.

The real estate investment trust is already developing an 804-bed, A$139-million site in the area.

“We remain focused on procuring high-quality properties and opportunities across strategic geographic locations and are very excited about the upside potential in student accommodation in Australia,” CEO Andrew Konig said.

“There is capacity for a lot more purpose-built student accommodation, as the market is undersupplied. With a capital uplift potential on these developments and return on equity well ahead of offshore funding costs, the investment proposition is compelling from a total return point of view,” he added.

A JLL Student Accommodation report has shown that, while total full-time students in Melbourne number just under 235 000, the existing supply of beds is around 19 200.

Australian Student Accommodation

 

Ndlovu who visited Australia in March says Redefine’s expansion in that country was helped by the fact that it has “on the ground presence”.

“Student housing is a competitive and demanding market.  It will be interesting to see how Journal succeeds with the leasing, operations as well as growing the business into a reasonable scale.”

 

 

He says universities are run as businesses in Australia and education is the third most important export for the Australian economy.

Education contributed AUD 28 billion to the Australian economy in 2017. The figure includes expenditure such as tuition fees and living expenses.   In 2007 the contribution was AUD 11 billion. The existing supply of student accommodation in the eight capital cities is less than 11% of the full time student population.

  • Universities in Australia have been run as businesses since the earlier government took away over AUD1bn of funding.
  • Universities compete with each other for the best students and as well as for big markets such as China
  • Universities have become commercial and there are socialist concerns that their primary focus should be on education.
  • Universities pay fees to agents in Asian so that they can direct the students to them.
  • Australian cities also compete for students as well

Victoria State

 

  • The state has the largest percentage of foreign students (ahead of New South Wales for example)
  • Most foreign students are Asian and Chinese make up 36%

o   There is a big number of Indian, Malaysian and Singaporean students too

o   American students are generally exchange students

  • University of Melbourne has about 45,000 students and about 35% are international
  • RMIT (officially Royal Melbourne Institute of Technology) has about 45,000 students and about 50% are international
  • Foreign students generally live on-campus or very close to the campus

o   Parents want to know where their kids will stay in their first year

o   After the first year the retention rate is about 40% to 50%

  • Students get familiar with the city, make friends and start to share in the second year.

Typical Prime Yields for Student Accommodation

 

  • Melbourne yields are typically 25bps higher than Sydney i.e. Sydney is more expensive.
  • Prime yields in Sydney are 6.5% to 7% and in Melbourne are 6.75% to 7.25%.
  • Journal Student Accommodation Fund is developing the two sites at 9% to 9.5% yield. Keillen says this means that there is room for yield compression i.e. capital appreciation.

Knight Frank Research

  • Australia enrolled 1,41m students in 2016. This is up 3% on the previous year and 18% above 2010

o   International students have been growing by 6% per year for the last 3 years

  • Full time students are 309,000 or 31% of all full time students in Australia (116,000 in 2001)

o   In comparison, in the UK there are 1.7m full-time students and only 23% are international

  • Australia is ranked third, after the US and the UK, in terms of a list of top universities according to a recent world university rankings survey.

What’s driving the growth in international students in Australia? 

  1. Simplified visa application process
  2. An expansion of international recruitment policies
  3. The relative safety of Australian cities
  4. Quality of universities
  5. Historically low exchange rate.

Journal  Student Accommodation Fund 

  • They have one of the best sites for two of the schemes coming up
  • They will manage the residences on their own
  • Looking at yield of about 9% to 9.5%
  • There is competition and the big test will be the leasing

o   Targeting 80% in the first year and up to 95% by the third year.

o   Sounds conservative but they prefer to under-promise and over-deliver

o   Big disequilibrium between the number of students and number of beds available

  • Looking at rents of $250 to $300 per week.

o   Strangely, student accommodation leases are quoted per week in Australia

o   48-week leases and rent is paid per month

o   Very low default rates and parents always pay

  • No provision for parking bays for student housing

o   Good public transport system- buses, train and most students cycle and live close to the university

 

Journal Uni Place – Leicester Street

  • Located in the suburb of Carlton and opening in January 2019
  • Developing 3 types of studios

o   single (16m²), standard (18m²) and large (35m²)

  • Also developing 3 types of apartments

o   Twin share (35m²), four bedroomed (107m²) and six bedroomed (131m²

  • The building will have 16 floors and outdoor and break-out areas with gardens, common space including a gym, rooftop barbecue area, karaoke time, cinema;

24 hour onsite support, full CCTV cameras, controlled entry, free Wi-Fi indoors and outdoors and smartphone entry access, focused study zones and libraries

  • It will have fully furnished rooms, one simple fee for all utilities like extra fast internet, air conditioner and smart TVs
  • Students will be able to walk, tram or cycle to a number of universities

Journal Central –  Swanston Street

  • Located on the iconic Swanston Street and opening in 2020.
  • Town planning hearing in June. Likely to be approved.
  • Will start construction a few months later (after the approval) to have completion coincide with the new semester

Supply coming through or some of the competitors

  • Urbanest is competition. www.urbanest.com.au
  • They are using Icon Construction for their upcoming development.
  • Journal is using Icon too and their accommodation rates will be market related.

 

What other accommodation options do students have?

  1. Live with families
  2. Rent an apartment and share.
  • But most landlords don’t like it as they cannot control the number of students staying in the apartments.
  • Besides the residential market is quite competitive.
  • And neighbors don’t like to have students as their neighbors.

University of Melbourne campus, accommodation and surrounds

Coffee chat at Seven Seeds Café 

 

  • After a lot of walking around the University of Melbourne and RMIT campuses, we decided to pause and have a coffee at Seven Seeds Café www.sevenseeds.com.au.

o   Sevens Seeds is a micro roaster and café serving great coffee and is located in the heart of the student area.

o   I absolutely loved this café. It has great designs, artwork and vibe. It was so busy that we had to wait to get a table or, let me say, a spot.

  • We ordered coffee and croissants. Given that it was so busy and also that it was later in the morning, there were only two croissants left.

o   One with Nutella and the other one with almonds.

o   I’d preferred the one with almonds, but I offered it to Sid and I took the Nutella one instead. I liked it.

  • Journal will be adding coffee shops like these at their student accommodation sites.

Australian residential market in general

  • The residential has been recession proof
  • Government has tried to cool off the market by increasing stamp duty from 5.5% to 12%. This has not helped.
  • Most properties are sold on auction and highest bidders tend to be Asian and mainly Chinese
  • Banks have increased interest cover from 1.5 times to 2.5 times for developers or property companies
  • Banks also need financials of the developer or construction company.

o   This is meant to given them comfort and to avoid a developer going bust and being left with an unfinished project.

  • One month’s rental deposit is held by government and not the landlord. The deposit earns interest.

o   It’s released by government when all leasing conditions are met

  • For example, when a tenant moves in, the landlord takes photos of the apartment for the tenants to sign.
  • If there are no complaints within 7 days, regarding the condition of the property, it is assumed that the tenant is happy.
  • When the tenant vacates the property and/or the lease is terminated, the landlord will take new photos and compare them with the initial ones.
  • If the property is in a worse off condition, the photos are sent to the government as evidence.
  • The deposit (or part thereof) is given to the landlord (instead of the tenant) to help fix the property.

 

Australian newspapers on economics and interest rates

 

  • Australian interest rates to stay below the US interest rates for years.

o   US rates now at 1.75% and increasing, whereas Australia’s cash rate is 1.5%.

o   Australia 10 year bond yield is 2.60% and US is 2.74%

  • US speculated to go to 2.25% by end of 2018. Reserve Bank of Australia (RBA) is likely to remain on hold.

o   Current negative rate of 0.75% and is widest in the modern era.

o   To get back in front, Australia has to hike rates aggressively and, let’s remember that’s on the country with the second largest housing debt burden in the world.

  • Conceptually, it means you can now get a greater return lending to the American government than the Australian government, which tends not to happen.

o   People need a bang for their buck for lending money to Australia, but the tables have turned.

  • Economists say that Australia’s increased reliance on China has laid the foundation for a decoupling from America.

o   Before the 2000s Australia was very aligned to the American economic and interest rate cycle, but that relationship has moved towards China.

  • Two-way trade with the US has gone from 17% of the total in 1987 to 9% today.

o   During this period China has replaced the US as Australia’s most important partner, and now represents 24% of the total two-way trade in goods and services, against a mere 2.5% in the late 1980s.

  • The RBA did not cut interest rates aggressively nor did it implement QE. It benefited from massive stimulus from China buoyed by commodity prices.

o   Slowdown came later as mining boom turned to bust.

  • The Australian dollar has been resilient even with higher rates in the US. Why?
  1. Strength in commodity prices on key exports such as iron ore.
  2. There are also worries around the US credit quality.