Real estate and infrastructure
Now is the time for universities to explore new thinking and ideas as they reshape for a sustainable future. What may have once been 'off the table' needs to be considered.
In our publication 'Higher Education - navigating market disruption', we encouraged brutal honesty in undertaking current state assessments and a breadth of thinking to effectively respond to market conditions and plan for the future.
Continuing with a diverse perspective on a range of transformational opportunities, this article offers real estate and infrastructure strategies for higher education providers to meet their capital requirements. Fortifying university sustainability does not need to be at the expense of student needs and expectations. A comprehensive self-assessment for higher education providers to evaluate their real estate strategies can be found here.
Demands of university infrastructure
It is well recognised that a modern campus experience must meet the demands of diverse student demographics, lifelong learning, on-campus experience (complementing online learning), automation, sustainability, and spaces that inspire innovation and collaboration. Concurrently, there is significant internal competition for funding and resource allocation, only heightened by current market disruption.
Together these competing priorities offer an opportunity to reconsider what real estate and infrastructure is needed for the future and encourage consideration of alternate funding mechanisms and solutions.
Real estate and infrastructure options
We explore below several strategies that may assist universities to meet the fiscal and capital efficiency challenges of delivering on contemporary campus demands beyond 2020. While the optimal strategy will be contingent on specific circumstance, all are guided by the proven principle of owning strategic assets and leasing operational facilities.
1. Disposal and exit from non-core holdings
The most conventional option for the higher education sector is the disposal of non-core property holdings. A successful non-core disposal program releases capital for reinvestment in more productive pursuits, whilst mitigating cash flow pressure posed by often substantial holding costs of real estate ownership.
While simple in concept, its success is contingent on preparing and executing a divestment strategy that, through rigorous analysis, distinguishes strategic assets that can support an institution's long-term success, from non-core real estate investments that divert capital from core needs.
Strategy in practice: Asset Portfolio Optimisation
Across Australia, universities have shelved or placed on hold an estimated $800m of capital projects in response to cashflow challenges posed by the COVID pandemic. Other institutions, such as Swinburne University of Technology have moved quickly to identify and divest non-core assets to address these challenges. A strategic review of Swinburne's broader asset investment portfolio, including direct property investments, led to the university's council announcing the intent to dispose of its Invicta House office building at 226 Flinders Lane, citing an opportunity to realise value.
2. Sale and leaseback
Intuitively simple but exceptionally versatile, sale and leaseback strategies can deliver innovative and highly efficient capital solutions.
What is a sale and leaseback arrangement?
Sale and leaseback arrangements involve the sale of an interest in property by the owner to a purchaser, where the parties agree that the property will be leased back to the occupier typically on a long-term basis. This releases unproductive capital in a short timeframe which can assist with liquidity pressures or be deployed elsewhere based on the organisation's strategic priority.
Owners who possess specialist development and asset management capabilities can quickly and cost effectively manage, design or build an optimal facility for the occupier to meet their requirements.
The commercial and broader occupancy terms of these arrangements are limited only by what can be agreed between parties. Common sale and leaseback options include:
- 100% sale and leaseback, potentially with an opportunity for substantial improvement.
- Sale and leaseback with embedded rights to 'buy-back' under prescribed terms, such as timeframe or another specified event.
- Partial sale of ownership interest and reciprocal lease arrangement with retention of an ownership interest, including ongoing participation in asset decision making
- Lease terms that protect tenant interests including the standard of accommodation. These can take many forms, for example:
- performance hurdles, such as a requirement for facility modifications to be delivered to 'tenant' satisfaction
- establishment of collaborative tenant-investor forums.
Strategy in practice: Victoria University
A partnership announced in 2019 between Victoria University, the Victorian Department of Education and Training, and ISPT - one of Australia's largest real estate investors, developers and managers - is a recent example of drawing on specialist real estate expertise to support core teaching and research functions.
ISPT will develop a new 32-storey vertical campus in the heart of Melbourne CBD, to be leased back to Victoria University, providing purpose-built accommodation and certainty of tenure, while freeing up capital for research and education. The 24,000 sqm vertical campus will incorporate office and teaching space for academic activities.
3. Precinct partnership
Modern ways of accommodating university research disciplines are increasingly innovative. The 'innovation hub' model is well established in many of the world's great university towns and offers real estate-led operational efficiency.
The model is based on co-locating university functions, research institutions and industry bodies, supported by an experienced and well capitalised real estate partner. When paired with the right real estate partner, design-led productivity gains provide additional infrastructure efficiencies.
Strategy in practice: Melbourne Connect
The Melbourne Connect project under construction in the heart of Melbourne couples the world class research and development of the University of Melbourne with aligned organisations, underpinned by the delivery expertise and financial capacity of specialist real estate partners through a consortium led by Lendlease. Highlights of the concept include:
Where to from here?
Now, more than ever, higher education providers should be evaluating their balance sheets to identify solutions available to address pressing revenue and strategic challenges. The use and structure of real estate assets in higher education organisations often overlooks the distinction between core strategic assets and non-core operational facilities.
Decision making on property assets is often delegated to facilities management teams, but senior executives should be examining these decisions through a broader strategic lens. A well-informed real estate strategy allows organisations to release the value locked up in these assets and apply it to solve today's unprecedented challenges and prepare for tomorrow's opportunities.
Innovative solutions are required to create flexible real estate footprints that meet the needs of students and staff whilst solving immediate cash flow demands. These strategies require adequate planning to implement and, with uncertainty continuing to impact financial positions, higher education providers should be considering the options available to them now.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.