At Western Sydney University in Parramatta, Charter Hall is forging an exciting asset class that delivers the very best in flexible, well located educational space for universities plus their choice of real estate equity.
The first completed education project that Charter Hall completed, in 2016, was 1PSQ, Western Sydney University’s new vertical city campus at Parramatta, Sydney’s fast growing “second CBD” for its law and business schools.
Around the corner, at 6 Hassall Street, Charter Hall and WSU have again partnered in a joint venture to deliver another city campus for WSU that will mark a unique collaboration between its engineering school, the engineering school of the University of New South Wales, as well as WSU’s school of architecture. Construction is well underway and due for completion in 2021.
WSU vice chancellor Barney Glover said this new hub is well placed to “harness emerging technologies and opportunities at scale to deliver a highly progressive, industry-engaged engineering course in Australia’s fastest growing region.”
Together these two buildings are worth around $600 million.
In another deal with WSU, Charter Hall is codeveloping a mixed use precinct for education, offices and retail at nearby Westmead, with an end value of about $350 million.
The Innovation Quarter will be another example of co-locating education and industry to “create pathways for the leaders of tomorrow”, Borger says. Some of its features will include, five star Green Star and NABERS energy targets, WELL Shell and Core enabled and hotel style end of trip facilities.
If that wasn’t enough, Charter Hall has another three properties in the pipeline that will nearly double the portfolio. Among even more opportunities to come.
It’s inevitable, Borger says, because the way tertiary education is designed and delivered is going through major change.
“To succeed in the education space you need a deep understanding of where universities are heading and what is important to them.”
Like so many other sectors, there are rising capital constraints. In addition, universities must compete on a global stage for the best students and the best research.
They need to offer the best possible amenities, teaching resources and facilities – and they can’t do that if the majority of their resources are locked up in real estate.
“Two thirds of their balance sheet is invested in bricks and mortar,” Borger says.
“They’re recognising that to succeed in the education space you don’t need to own the real estate.”
“We’re not calling the end of the campus solution yet, but how education is being provided is changing.”
“Universities are now offering education through the ‘third classroom’ where you read lecture notes online, out of university contact hours, and come in to university to have tutorials, which are more like workshops.”
Today’s students also want better amenity, Borger says
“Most students are working part time or full time and it’s important that they are close to work employment, retail amenity and transport. That’s a really big driver.
“Also, universities themselves recognise that their students have changing needs and universities want to be close to commercial organisations as well that can offer them a taste of what life after university could be like.”
It’s all about providing the best learning environments, technology and amenity along with unique partnerships with corporate tenants that offer a unique real life experience. This is what will attract talent to learning institutions.
1PSQ is a great example of this
Most of the 15-storey building is occupied by the Business and Law School, but part of the top floors of the building are leased to PwC, which runs programs for undergraduate and, postgraduate research. “It’s a win-win situation for both,” Borger says.
1PSQ’s interior designer, Georgia Singleton of Woods Bagot, says the concept abandons the “siloed” approach of a traditional university and embraces a “terrain approach”, with a blurring of boundaries.
The idea is like that behind the Massachusetts Institute of Technology, which was designed so that architects and engineers could work together, allowing for more conversation and serendipity in learning, informal spaces, teaching spaces and labs, as well as “social glue” spaces where anything could happen.
All these elements are encouraging universities to think differently about the way they manage their capital, Borger says.
Universities are realising that they can partner with groups that can help them deliver innovative solutions to their real estate requirements.
This is where the private sector can chip in with some creative options. There is a range of different models that can be adopted, Borger says.
One he calls an “equity light” model, where the private sector provides the capital to create the facility and the university leases it back, typically for 15 to 40 years.
1PSQ is a prime example of this.
Charter Hall has developed the building, the university has leased all but four of the 14 floors for 15 years, and PwC and WaterNSW are leasing the balance on shorter lease terms providing some capacity for the university to grow in the future.
At WSU’s second Parramatta CBD site at the 15 storey building at 6 Hassall Street, Borger says the university wanted to be both part owner and long term tenant. It wanted to share in the upside of the real estate but the deal also allows either party to exit at any time.
“So Western Sydney University and Charter Hall will jointly develop and own the asset.
“Separately to that, the university will lease half of the building and we will lease the balance of the space to commercial tenants who can provide that workplace experience for students. For those tenants it is a great way to attract and retain talent.”
So with the joint venture, the university wears two hats – as both venture partner and tenant.
The university in this case wanted to take part in the potential upside of the real estate, with flexibility for both parties to exit the project subject to a long lease.
The third model is the more traditional sale and leaseback model, which has been happening for some time, Borger says, but “the potential for us is to open up the opportunities as investors”.
“We see education as a great investment where our partners are both tenants and investors, which aligns with achieving great outcomes.
“Education is the third largest export behind iron ore and coal, so it’s the largest services sector in the country.
“You have sticky tenants that make a long term commitment. And if the asset meets the key attributes of location, quality of facilities and access to other corporate tenants, public or private, I think you will continue to see that model roll out, especially in downtown locations that are increasingly important,” he says.
And it’s here that universities are realising that access to land is sometimes complex, and that the divestment model means “they can provide good education with the right economic solution and the benefit of partnership”.
Collaborating with the private sector
The private sector can also help attract other commercial tenants into the portfolio, such as at Hassall Street.
In the end, universities today need the same elements that commercial tenants want: buildings that are connected to good transport, have good amenity, sustainability and technology, Borger says.
“And their move away from lecture theatres to smaller teaching environments means that they can now occupy vertical campuses in CBD environments.
“We have been honing our skills in high rise office development fore more than 28 years and we can use those skills to meet the needs current needs of the university user.”
Borger says he’s looking forward to announcing another two big deals that will almost double his company’s investment in the sector.
“It’s not new to us, we’ve been listening to our partners in this space and learning” he says, “but what’s happening now is on a different level.”
Sustainability is core to good university buildings
Borger says core to the various models is “making sure the product is right for the students and academics and research”.
And that means sustainability, for multiple reasons, but particularly because universities have “very strong aspirations” on sustainability.
“At 1PSQ we were able to deliver a Five Star [Green Star] education rating for the building.
“Sustainability is at the core of what we do, in terms of the occupational footprint of getting the right energy and water efficiencies and in creating the right environmental quality for students, academics and stakeholders.”
But the partner model means there is a lot of transference of value the other way too. “We learn a lot from them,” he says.
“We’ll tap into what they are seeing at the edge of innovation.”
There are a number of drivers for campus sustainability
There are a number of drivers for campus sustainability, Borger says.
“Universities recognise that in economic terms, sustainability makes sense for the asset and for long term assets it make senses in terms of lower operational costs.
“Secondly, they also recognise students and academics will get the benefits of working in a sustainable place. They want to create progressive places to learn and research in and to be collaborative.
“Thirdly, universities recognise through their own research that sustainability is a key part of the narrative, and that it’s actually now part of the everyday approach to the built form.
“You can also add the leadership perspective, and this gives them a live way to demonstrate what they’re teaching at an academic level: that this can be an economic reality of what they do.”
Is sustainability now part of the brand for universities?
“Very much so – as we saw 10 years ago when sustainability started appearing in offices, part of the offering to corporate tenants were the environmental initiatives.”
Increasingly we will see students making choices of where to go based on sustainability, he says.
“At the moment it’s in the top 10 of criteria, but I think we’ll see that coming to the top five reason for academic selection.”