Student Housing Financing: Thinking Outside the Box
Vie Management’s Derrick Milam talks about foreign investment in student housing and the particularities of Sharia-compliant funds.
With a value-add strategy in mind, Vie Management has been financing, acquiring, developing and managing student housing properties across the U.S. for almost a decade. Although he admits securing financing has become much more challenging since banks and agencies “increased their scrutiny of student housing transactions”, Co-Founder & COO Derrick Milam told Multi-Housing News that he expects private lenders to fill this void.
In addition, Milam anticipates that international investors will continue to play an important role in the student housing niche, particularly in markets with Tier 1 universities. Last year, Vie Management and its Middle East asset manager secured a $134.7 million Sharia-compliant equity and debt loan for a student housing portfolio totaling 2,059 beds across six states. In the interview below, Milam talks about foreign investment in student housing as well as the benefits and challenges of using Sharia-compliant funds.
What markets do you consider most promising in terms of student housing investment and why?
Milam: We find markets with large universities committed to enrollment growth, where you can secure attractive communities with upside potential and proven liquidity upon exit as the most promising. Generally, these will include Tier 1 universities with underperforming communities buoyed by the economic strength of a growing metropolitan market.
Students are diligently evaluating the cost of their education these days and whether they can secure a return on what is a significant investment. They recognize that the larger schools have many attributes that will greatly impact their overall personal success down the road, such as having a powerful network of alumni to facilitate the attainment of employment upon graduation. This demand, in turn, will continue to make high performing universities with underperforming communities attractive.
How has the process of financing student housing acquisitions changed in the past years?
Milam: Securing financing has become much more challenging as agencies and banks have increased their scrutiny of specifically student housing transactions. In prior years, a borrower could readily secure financing from multiple sources for transactions at second and even third tier universities for communities located as far as three miles from campus. Today, many traditional student housing lenders are only lending to borrowers who find properties located at Tier 1 universities and no farther than a mile or so from campus.
Furthermore, these communities must have a history of consistent occupancy and performance to meet lender credit requirements. The market will continue to move in this direction for traditional lenders, but as is the case with any dislocation in supply and demand, private lenders will excitedly fill this funding void.
What student housing investment trends will be most prevalent this year?
Milam: Traditional lenders become much more cautious as campus enrollment flattens and even declines for second tier universities and colleges. As a result, investment in student housing will continue to flow to Tier 1 universities with proven liquidity. We expect investment capital to continue to focus on finding operators capable of creating value, particularly as these well-located communities trade at low cap rates.
A trend that will be very big in the student housing sector this year will be the continued interest from international investors and an expected emergence of other creative forms of financing. Last year, we saw student housing transactions slow and this year we would expect to see more innovative forms of financing and deal structures to address concerns about risk and changing capital markets interest.
Why are more foreign investors showing interest in the U.S. student housing?
Milam: Foreign investors often times find student housing offers recession protection and security, with an opportunity for outsized returns versus other risk-adjusted investment options. There is also a welcomed synergy between investing in housing and promoting students from the investor’s country of origin who attend university abroad. The merger of both investment strategies with the ability to promote cultural interests provides an added benefit for foreign investors, making U.S. student housing a particularly attractive investment option.
What are the benefits and challenges that come with Sharia-compliant funds?
Milam: We view our investment model as accommodative of different investor needs which means we must remain flexible but consistent with our core investment values and principles. Whether a Sharia-compliant transaction, foreign capital seeking exposure to the U.S. markets or our existing domestic partners, we find there is no difference in expectations as long as our investment partners have the same values and ethos concerning investment.
The first time we executed a Sharia-compliant transaction, it required extensive structuring, which proved more challenging, but now that we’ve completed this, we have an existing model that is easily replicable and can deploy more capital efficiently. Transactions like these have expanded our ability to meet a diverse investor base because we’ve already incurred the costs to create the structure and developed an expertise in how to meet the needs of our investors.
What does a real estate investor need to know about Sharia-compliant funds before making use of this type of financing?
Milam: The Sharia-compliant execution is more than just a transaction structure, it’s a way of operating. The transaction structure prohibits the payment and receipt of interest, thus the lender is unable to lend directly against the real estate. The transaction is structured to comply with this requirement which involves several participating parties and entities.
The requirements extend to how you invest and operate as well. For instance, Sharia-compliant funds prohibit investment in and the operation of a location manufacturing or distributing alcohol, tobacco or engaging in certain entertainment activities of questionable ethical basis. We find these requirements dovetail with our brand and thus there is a continuum between the requirements and our investment and operating philosophy. We look forward to expanding our Sharia-compliant investment vehicle by offering this option to more investors seeking access to Sharia-compliant student and multifamily housing in the U.S.
Tell us about your company’s expansion plans.
Milam: We have completed several favorable dispositions over the last 24 months and are constantly searching for new opportunities to deploy capital where we can drive capital appreciation for our investors. We believe our investment model has proven effective and thus we have received interest from capital partners seeking more exposure to student housing.
This interest creates opportunities to pursue more transactions consistent with our value-add investment strategy and deliver an expanded brand experience to potential residents in new markets. We are always interested in further concentration of capital in our existing markets and opening locations in new markets inclined to view our brand favorably.
What are your expectations regarding foreign investment capital in student housing going forward?
Milam: We expect to see more foreign capital continue its pursuit of student housing because of student housing’s ability to meet foreign capital’s investment and strategic imperatives. We expect to see changes in how lenders and operators conduct their business as more foreign capital enters the space and pushes for changes to better meet the needs of the invested capital.
You will see customization over time with country and region-specific funds accumulating certain kinds of assets at target schools and then creating cultural specific housing to meet the needs of students studying abroad from the nations represented by the investment capital. Foreign capital has and will continue to bring change to our industry, thereby expanding how we think about student housing, its operations and funding.