Q&A: Dino Zuccollo: Student housing is a predictable and consistent income stream

8 October 2020

Source: BusinessDay    By: Alistair Anderson

Student housing has become an asset classes set to provide double-digit returns in the coming years with SA short of about 300,000 student beds.

However, it barely features in SA’s listed sector, despite calls from fund managers for a student listing. Back in 2018, the Inkunzi Wealth Group pulled its student listing after it failed to raise the capital needed to acquire assets for the listing.

Business Day spoke to Dino Zuccollo, an executive member of Westbrooke Alternative Asset Management’s Section 12J fund, about investment opportunities in student accommodation. Zuccollo is also chair of the Section 12J Association of SA.

Section 12J is an investment tax incentive designed to encourage investment into a range of private companies which meet defined criteria. The incentive gives taxpayers the ability to write off 100% of their investment against their taxable income.

Founded in 2004, Westbrooke has raised R800m and so far invested R350m in student housing through an entity called Westbrooke Stac, a fully tax-deductible investment. The investment aims to provide investors with a return in excess of about 17% a year. Westbrooke Stac has invested in eight student businesses.

Q: Why did you initially fund student housing?

A: There are a variety of reasons for this. We were attracted to the unique supply and demand fundamentals inherent in the student accommodation market, in terms of which there is a significant shortage of student beds around the country, making it a defensive, property-backed asset class which we think would be attractive to local investors.

An investment in student accommodation is also well aligned to government’s strategic objectives of reducing the current beds shortage and from an impact perspective makes a meaningful difference to the beds situation around the country.

The sector is highly fragmented with little competition from an institutional or quasi-institutional perspective. We can find a meaningful path to exit, be it through the potential to build a credible local listing or private property fund in the future.

We focus on Section 12J and an investment in student accommodation is allowable under its rules.

Could we see a student housing listing in 2021?

I personally think that 2021 is ambitious. There are two major reasons for this.

First, with property companies having been put under a lot of pressure through Covid-19 and discounts to net asset value widening across the board, I think that a new listing of any property stock will be a challenge.

Second, one of the issues facing the local student accommodation industry is a lack of discrete, credible data in terms of the demand from students, the supply currently in the market, the split of this in the various geographies and how student accommodation has performed historically.

Most information available to date is anecdotal or an estimate. I think that the industry needs a bit more time to collate this and then present this to institutions ahead of a listing in order to build the depth of knowledge of the asset class.

In this context, I would say that a local listing is probably still a few years away although likely at some stage in the medium term.

How would you be involved in a listing?

We would look to either list our portfolio ourselves or participate in another listing. At the end of the day, key to a successful student listing is to build scale and diversification across a high quality portfolio. As such, it is likely that any credible listing would require some level of consolidation in the market to achieve this scale.

Would student housing suit real estate investment trust (Reit) investors?

I believe so. One of the biggest attractions of student accommodation in SA is that it produces very predictable and consistent income streams, underpinned by increasing local student numbers and the supply-demand imbalance.

The fundamentals have also produced solid growth in income over a number of years, which has typically averaged 8% historically. Furthermore, acquisition yields can reach double digits on an ungeared basis.

The combination of this results in a consistent, predictable, growing dividend per share number that I believe will be attractive to Reit investors. In addition, the National Student Financial Aid Scheme pays for a large amount of local student rentals across the country, which creates a quasi-government underpin.

What has prevented student funds, private and listed, from flourishing in SA?

The fragmented nature of the industry, where there are a large number of players that own relatively small student accommodation businesses, has made it difficult to achieve meaningful scale.

The nature of student accommodation is very different to a traditional Reit student accommodation and is a far more operationally intensive business, which requires different property management skills to what Reits currently have in-house.

In addition, student accommodation is generally underpinned by 10-month leases directly with students or leases with universities, but for a far shorter term than what traditional Reits are accustomed to.

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