A $25 billion treasure chest of real estate held on university balance sheets could help the country’s top institutions meet revenue shortfalls while opening the way for property players to expand their footprints in the education sector, according to a UBS analysis.
The analysis of the property portfolios of the country’s top 10 institutions comes as the university sector faces an estimated $16 billion loss in revenue over the next four years as international student enrolments collapse.
Revenue from international student fees plays a major role in funding universities’ investment in research.
“To maintain their investment in research and innovation, their existing real estate holdings are likely to be considered as funding options,” the UBS analysts, led by Grant McCasker, wrote in a recent report.
That balance sheet tally of property held across the top 10 universities includes $17.3 billion of buildings, $5.3 billion of land and $2 billion of properties under construction.
“Universities may look at potential sale and lease of existing buildings but also monetise their land holdings while partnering with developers,” the note said.
“We would anticipate universities monetise existing land holdings and partner with developers rather than a significant amount of sale and lease-back transactions.”
Even before the disruption caused by the pandemic hit universities’ funding streams along with the broader economy, the higher education sector had been opening up to commercial property players.
Among them, Charter Hall this month kicked off the first stage of a health and medical research hub in Sydney’s south-west, teaming up with Western Sydney University to develop a $350 million “Innovation Quarter”.
“Broadly, the view is that universities will continue to take advantage of their land assets,” Charter Hall chief executive David Harrison told The Australian Financial Review earlier this month.
“I think you’ll see more and more universities that are accessing their balance sheets and turning these balance sheet assets into development profits and income-producing assets, while also partly occupying the buildings.”
Another example of the emerging trend is in the heart of the Melbourne CBD, where super fund developer and investor ISPT is creating a $400 million vertical campus for Victoria University. Two years ago, La Trobe unveiled its vision for a $5 billion redevelopment of its real estate, flagging the potential for involvement from commercial property platforms.
However, since the pandemic slowdown struck, a number of universities have had to put the brakes on their own capital works spending programs as revenue dries up.
Angelo Scasserra, Credit Suisse’s co-head of investment banking and capital markets in Australia, said there would likely be strong demand for university property offered through sale and leaseback deals, given the appetite from wholesale and listed investors for assets on long leases occupied by blue-chip tenants.
However, not all university properties would be suitable for such transactions with top institutions unlikely to part with historically significant buildings. Properties sitting on Crown land might lend themselves to ground leases or infrastructure-style concessions for 20 to 40 years to make use of the building, Mr Scasserra said.
However, even from a smaller pool of available real estate, universities could potentially divest assets backed with long leases in various ways.
“If there was a pool of assets of say $400-500 million or above, backed by long-term university leases, it could be listed as a REIT, or it could be absorbed into existing social infrastructure funds, or there would be wholesale investors chasing it,” he said.