IMPACT OF COVID19 ON INDIAN STUDENT HOUSING
Amidst the political, social and economic uncertainties of the COVID-19 pandemic, real estate and alternate real estate asset classes have been impacted to varying degrees. One of the asset classes that has attracted significant investment in the last three years has been student housing with about US$600 million being committed.
Investment in this asset class was driven by market potential; approximately 40 million students and a demand supply gap - only 20% students getting a hostel bed in the university; relative stability of cash flows and higher yields. Student housing operators can be broadly classified into two classes based on the operating models adopted basis their relationship to the educational institutions:
Business to Business/Institution (B2B): Education institution model: Supply controlled by the education institute with the beds either being on-campus or off campus. For the off campus version, the institute will provide a minimum guarantee for the number of beds and the on-campus ones are usually management contracts for on-campus hostels.
Business to Consumer (B2C): Student as consumer model: This segment competes directly with PGs and sources demand without any assistance from the university and directly reaches out to interested students. While a majority of the operators active in India have a mix of both models in varying proportions, few are present only in the institutional model.
While a majority of the operators active in India have a mix of both models in varying proportions, few are present only in the institutional model.
COVID-19 AND ITS AFTERMATH
The closure has happened at almost the point when students were scheduled to leave for vacations and therefore revenue impact is lower than had it happened earlier in the academic year. Nonetheless, operators in both models are impacted.
Most of the operators operate an asset light model but about 70-80% of the total costs are fixed (rent, taxes, overheads etc.). Though the operators will see an impact, the quantum is more manageable compared to some other real estate classes. Some of the operators have also claimed that they can target to break even for this quarter (April – June 2020).
THE CURRENT SITUATION OF COVID-19 HAS RESULTED IN MAJOR CHANGES AFFECTING ALL FOUR STAKEHOLDERS — THE COLLEGES/EDUCATIONAL INSTITUTIONS, STUDENTS, ASSET OWNERS AND THE STUDENT HOUSING PROVIDERS/MANAGERS. ERNST & YOUNG LLP REPORT
The B2C model, where most students pay monthly, has seen a larger impact. Students who have left are less likely to pay their monthly rentals for remaining two months. But most operators have two months of refundable security deposit which may help them avoid revenue shortfall, though students may use force majeure as a reason to claim refunds.
Institutional operators who have annual/ quarterly collections have been less impacted as the advances provide the necessary liquidity support. Most of the operators have revenues secured till end of this college semester, i.e. till June 2020. There could however be pressure from both students and the educational institutions to refund the advances partially though we have not heard any such measures in the offing.
Players having management contracts with universities are less impacted. In such models, all operating and upgrade costs are managed by the university while operator is paid a monthly management fee on a lump sum basis. Operators are likely to continue receiving the monthly fee as per contract terms at least till June 2020, though it is possible that universities ask the operator to share the burden of any losses they face.
Given the current scenario of low occupancies and stressed revenues, student housing operators are actively pursuing cost optimization for both fixed and variable components. The student operators are considering various cost saving initiatives:
Rent renegotiation: Rent is the largest cost component accounting for about 40-50% of total costs. However, landlords are also pushing back on grounds that operators have banked the rentals of some yearly students and have the funds to pay rents. The bargaining power of student operators is stronger when they have taken whole buildings and the landlord has invested in asset refurbishment and modifications. Landlords realize that terminating the lease agreement will not be beneficial since a new operator will expect lower rentals and the time to get a new operator is also very short if they don’t want to miss the next session.
STUDENT HOUSING OPERATORS AND AGGREGATORS TAPPED INTO THIS MARKET AND INVESTED IN SETTING UP LARGER FACILITIES WITH MANY AMENITIES AND VARYING DEGREES OF TECHNOLOGY INTERVENTION. RENTAL YIELDS (10-15% COMPARED TO 8-10% FOR COMMERCIAL OFFICE ASSETS) WERE ALSO BETTER THAN IN OTHER ASSET CLASSES ON A RISK ADJUSTED BASIS. RISKS WERE CONSIDERED TO BE LOWER SINCE EDUCATION WAS CONSIDERED RECESSION PROOF AND LOW CHURN RATES MADE FOR STEADY CASH FLOWS.
Operating cost: These account for 15- 20% of revenue. With regards to variable costs such as housekeeping, security, laundry services, etc., operators are optimizing costs through complete closure or partial operations where some students are stuck pending the opening of inter-state transportation. Some operators claim to have suspended vendor contracts for few months while others continue to honor minimum vendor payment as per contract.
Pay cuts and layoffs: Operators maintain that there have been no pay cuts until April 2020. However, subsequent months may witness 25- 30% reduction in wages, if the crisis continues.
STUDENT HOUSING OPERATORS AND AGGREGATORS TAPPED INTO THIS MARKET AND INVESTED IN SETTING UP LARGER FACILITIES WITH MANY AMENITIES AND VARYING DEGREES OF TECHNOLOGY INTERVENTION. RENTAL YIELDS (10-15% COMPARED TO 8-10% FOR COMMERCIAL OFFICE ASSETS) WERE ALSO BETTER THAN IN OTHER ASSET CLASSES ON A RISK ADJUSTED BASIS. RISKS WERE CONSIDERED TO BE LOWER SINCE EDUCATION WAS CONSIDERED RECESSION PROOF AND LOW CHURN RATES MADE FOR STEADY CASH FLOWS.
BEYOND COVID-19
Operators having assets on fixed lease or minimum guarantees are evaluating switching to a revenue share model though landlords will also be averse in the current situation. Long term B2I model would be preferred which provides operators with guaranteed occupancies and timely payment schedules but the number of options are limited and will also witness more competition resulting in compressed yields. While operators may continue to expand off-campus facilities, they may keep aside a larger share of their bed inventory for B2I university tie ups.
Operators are looking to rearrange their financial parameters by taking the following actions.
SECTORAL CHANGES
The sector may consolidate in the next few months, with some smaller operators exiting, resulting in stronger operators with sustainable financial and operational model. A few universities have reached out to operators asking them to collect fees on a monthly basis rather than collecting a full year in advance to reduce the cash flow impact on parents. Some operators are hoping for regulatory intervention that supports rental exemptions for tenants in such scenario. However, the regulation may also force the operators to pass on the savings to their students.