Singapore institutional investors tap opportunities in Adelaide and student housing sector in the UK

By Amy Tan

/ EdgeProp Singapore |

September 27, 2019 11:30 AM SGT

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SINGAPORE (EDGEPROP) - Last year, investors were gearing up for higher interest rates and anticipating a recession. Today, not only is the current US economic cycle double the average length of the previous 33 cycles, investment yields are also largely compressed, according to data from OECD and Knight Frank. Similarly, the UK is nine years into its recovery from the global financial crisis while Australia is more than 27 years into its economic cycle.

While many mature economies are experiencing elongated cycles, their long-term average growth rates are moderating. Typically, local developers and Reits turn to key cities such as London, Sydney and Melbourne for accretive assets. Given the current macroeconomic environment, they are now searching for yield in secondary cities and suburban areas, observes Emily Fell, Knight Frank’s director of capital markets.

Emily Fell (Photo: Samuel Isaac Chua/EdgeProp Singapore)

“We’re seeing Singaporean investors being extremely active whether they are institutions or private funds or listed developers. More and more, their focus is on suburban locations and not just the CBD,” she states. An investment destination that has been gaining favour among investors is Adelaide in South Australia.

Hunting for yield in Adelaide

In March, Adelaide received A$551 million in funding from the government to turn the city into a “centre of innovation excellence”. To attract companies and drive innovation, South Australia has also invested some A$7.6 million to roll out new fibre optic cables for 29 innovation precincts.

Prior to these initiatives, Elon Musk gave the city a boost when he introduced a new SpaceX rocket at a space conference in September 2017. Later that year, he built the world’s biggest lithium-ion battery to drive down local electricity prices.

With these developments, Soilbuild Business Space REIT acquired 25 Grenfell Street in Adelaide CBD in August for A$134.22 million. The freehold Grade-A office building has a site area of 21,183 sq ft and net lettable area (NLA) of 268,766 sq ft comprising 22 levels of office floors, and two levels of retail space.

Adelaide office stock by grade (Source: Knight Frank)

Soilbuild is not alone in tapping Adelaide’s potential. In July, Suntec REIT made its foray into Adelaide by acquiring the entire stake in 55 Currie Street, a freehold Grade-A office building in the CBD, for $148.3 million. Meanwhile, Mapletree Investments bought a premium Grade-A office building at 11 Waymouth Street in March 2018 for A$202.5 million.

According to data from Knight Frank, this year has seen A$600 million of office transactions by international investors so far. The deals by Soilbuild and Suntec make up almost half of that, at A$282.52 million. In addition, the two deals account for 13% of transactions made by Singapore institutions in Australia, says Fell. Comparatively, deals by Singapore institutions into Adelaide only accounted for 1% of total investment into Australia last year.

“The government has been very effective in encouraging business in Adelaide partly through the abolishing of commercial stamp duty. It’s the only city in Australia to do that, so it has really encouraged investment,” she says. “These in turn provide a lot of employment and demand for office space. We’re now seeing vacancy rates in Adelaide down to its lowest point over the last 10 years at 12%.”

Adelaide CBD Gross Supply (Source: Knight Frank)

According to her, investor interest in Adelaide is starting to outpace that in Sydney and Melbourne after yields compressed to around mid-to-low 4%. “This makes it difficult for Reits as they have to buy at accretive yields that are typically around the 6% level,” she states.

Stable yields in student housing

Apart from commercial properties in Adelaide, Fell highlights, investment interest in the student accommodation sector in the UK and Australia remains robust as investors seek safe havens.

In March, Adelaide received A$551 million in funding from the government to turn the city into a “centre of innovation excellence” (Photo: Shutterstock)

In particular, Fell has seen an increase in demand in the student accommodation segment in the UK. “It’s more than what we’ve expected. It is mainly driven by portfolio consolidation and major groups that are trying to build up scale,” she says.

She has also seen more interest from institutional investors from Hong Kong and China. “It’s a stable asset class, especially in the current economic environment. It’s known to be resilient in turmoil, it’s got year-on-year rental growth and it’s got some very attractive fundamentals for [institutions] looking to diversify, particularly in a period of long, late [economic] cycle,” she adds.

Overall, yields for student housing in the UK are sub-4%, according to Knight Frank. Yields in the prime regional cities range from 5.25% to 5.5%. Fell points out that these yields are compressed compared with four years ago where average yields hovered at above 6%.

On the other hand, she has not seen as many transactions in Australia despite investor interest. Fell reckons this is due to the presence of major student accommodation operators such as Scape, Global Student Accommodation (GSA) and Urbanest. As a result, it is difficult for an investor to enter the market and achieve scale.

This could change as the Australian arm of Urbanest is on the market for more than A$2 billion. If transacted, Fell believes it will set the benchmark for the market. “This is still in due diligence but it attracted a lot of buyers with significant portfolios in the US and UK that want to create a truly global brand,” she says.

As there are few transactions in the student accommodation sector, Fell concedes that it is difficult to provide a clear indication of yields. She estimates that it is competitive at around mid-5%. The most recent transaction took place early this month when Scape Australia took over the Atira portfolio of facilities controlled by funds manager Blue Sky and investment bank Goldman Sachs in a A$700 million deal.

Looking ahead, Fell asserts that uncertainty over the position of the real estate cycle and the outlook for returns is encouraging investors to target different types of real estate exposure. “You have to be quite adaptive in this macroeconomic environment. We’ve seen investors change their strategies a lot,” she says.

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