Australian universities explore asset sales
Australian universities are facing increased downside risk due to the pandemic and may look to explore asset sales as a result.
COVID-19 has led to the closure of Australia’s borders. Only Australian citizens, residents and immediate family members can travel to Australia. As a result, overseas arrivals into Australia fell from a three-year peak of 1,183,090 for December 2019 to just 6,560 for April 2020. The numbers have remained at low levels in May (8,290) and June (11,700). The border closure has negatively impacted the tourism sector and has created a significant headwind for the education sector.
Figure 1: Overseas arrivals into Australia
Source: Australian Bureau of Statistics, June 2020
International student levels have been steadily rising in Australia since 2005, with enrolments reaching approximately 400,000 over the 2019 calendar year. Australia has a strong tertiary education offering, with eleven universities ranking in the Top 200 universities globally according to Times Higher Education. The number of highly rated educational institutions and the liveability attributes of Australia’s major cities makes it attractive to international students. International education is worth approximately AUD 32.4 billion to Australia on a yearly basis, according to the Australian Bureau of Statistics. Education is also the country’s 4thth largest export by value (8.2%) according to the Department of Foreign Affairs and Trade.
Figure 2: International student enrolments in Australian universities
Source: Australian Education International, 2019
The pandemic and resulting restrictions on mobility represent a short-term downside risk for tertiary education providers. The Australian Government subsidises tertiary education for domestic students by paying a portion of their fee directly to universities, while students contribute the remaining amount. Therefore, international students have to pay a substantially higher upfront fee for tertiary education, with universities increasingly relying on this income stream.
With limited international enrolments at present, universities may look to explore other revenue-generating streams, such as switching to an asset-light model by selling non-core commercial assets or engage in the sale and leaseback of core assets. These assets are typically located near central business districts and are usually either office assets or land holdings and so have significant refurbishment or development upside. Importantly, sale and leaseback allow for the receipt of upfront sales proceeds whilst allowing the university to maintain a long-term leasehold interest in the land. The long-term economic health of the university sector, the strong covenant on offer and the portfolio overweighting towards real assets in this low yield dominated environment would likely result in a deep buyer pool for transactions structured this way.
We have undertaken a market-sizing exercise to assess the commercial property and landholdings of the top 20 Australian universities using publicly available reporting data from the universities. We estimate the value of buildings owned by this segment of the market at a minimum of AUD 23.4 billion, with landholdings contributing an additional AUD 6.8 billion. While universities are likely to retain ownership of strategic assets, the current economic environment and income pressures may result in their selling non-core or dated buildings and landholdings with development upside.