The Financial Review, 17 May, 2007.

Investors eye $20bn uni property bonanza
Mathew Dunckley

Darren Olney-Fraser, chief executive at fund manager Australian Public Trustees, is bullish about development opportunities in the $20 billion university property market following the federal government's creation of a large endowment fund.

“They have cracked the door open for property trusts to get more involved with universities – we’ll bash it down,” he said of the $5 billion Higher Education Endowment Fund included in last week’s federal budget.

Mr Olney-Fraser is not alone in his optimism. Many of his peers believe the $5 billion HEEF will help private sector operators convince some of the more conservative university administrations to team up with them on major capital projects.

Universities are sitting on $20 billion worth of land and buildings, and they spend almost $500 million a year on maintenance alone. Some have already flirted with the asset hungry private investment groups, usually because of cash flow issues.

But the new fund is tipped to escalate that engagement because its design will push universities to seek private partnerships.
Investment returns from the fund will be used to support capital works and research facilities with more than $300 million in grants available annually over its first three years.

Universities applying for funding will receive preferential treatment if they can show they have raised matching funds from the private sector or other sources.

“I am confident that if the government, out of the investment fund, only has to pay for half the cost of a new building, they would view that very favourably,” Australian Vice-Chancellors’ Committee president Gerard Sutton said.

Universities were now examining a variety of different funding sources including public-private partnership arrangements. “If you can get a $3 building for $1 upfront investment you will run with it,” Professor Sutton said.

“That sort of thing, in greater volumes, is inevitable but we need to be careful. It is tricky business even for experts.”
The property industry has knocked on the door of universities for years attracted by the sheer scale of their holdings.

Some projects already under way involving the private sector include Curtin University’s $100 million chemistry facility, $220 million redevelopment of a dilapidated mall on land belonging to Monash University and Queensland University’s $60 million pharmacy complex.

Universities have also had forays into property development and investment in their own right. Macquarie University recently announced it would establish a $1 billion property trust to hold commercial developments, focused on North Ryde.

For now, the trust is 100 per cent held by the university but private investors will eventually be let in and the university has flagged a potential listing down the track.

Mr Olney-Fraser said the extra funding from the budget would go a lot further if universities used it to leverage larger developments in partnership with the private sector as was common practice overseas.

A similar system in Cananda, which provides only up to 40 per cent of a project’s cost, has committed $C3.69 billion ($4 billion) to support 5000 projects at 129 research institutions since 1997.

Peter Wills, chairman of private property investment and development group CRI Australia, said the foreshadowed size of Australia’s endowment fund could underpin $2 Billion worth of projects every year.

“It is fantastic. What it brings to the front of mind is that the universities have to get a lot smarter about the assets that they sit on. Many have been sitting on lazy assets,” he said.

That would mean that to get an ongoing revenue stream essential to a property investor, they might need to provide additional space in a development to lease out to private-sector tenants, he said.

Another option would be for universities to put assets into property funds in which they would be unit holders.
“[The fund] will open up all these sorts of ideas which, I think, is a good thing,” he said.

Industry Superannuation Property Trust chief executive Daryl Browning said returns and the security of returns were paramount for superannuation funds and the credit backing of most universities was first rate.

Another senior property investment source said heated competition in the market made universities even more attractive.
“There will always be an investment appetite for it. Any asset which has tenure and income associated with it someone will want to buy it as long as the parameters are fair and reasonable,” he said.

There are hurdles. Some universities, such as Melbourne and Sydney, have to get ministerial approval for any major land deal over most of their campuses.

Speaking before the budget, Plenary principal Ray Wilson said there had already been a change of thinking and universities were now looking at how to work their balance sheets as they competed in a global marketplace.

Plenary Group is building a school of pharmacy for Monash University that it will own and operate over a 25-year agreement.
“They have large land holdings and need to look at rationalising their whole approach. They are all looking at trying to be a bit more savvy in terms of existing developments and future developments. It is happening in Europe and the States and Asia as well,” he said.

Mr Wilson said universities were particularly attractive as development partners and tenants not least because of their exceptional credit rating – rating agencies usually gave universities an AA rating.

Monash University chief financial officer David Pitt said the university had chosen to partner the private sector on major projects at Caufield and Parkville in inner Melbourne after considering the impact of traditional borrowing on its gearing and other ratios.

Bob Kotic, deputy vice-chancellor at the University of Sydney, said greater involvement with the private sector was something that would certainly be considered down the track bit it would be done on a hard analysis of returns on offer.

“Perhaps they see us as piggy they can take to market,” he said, adding that the university’s property portfolio was worth an estimated $3 billion. He said smaller universities were more susceptible to advances from deep-pocketed financial institutions.