As investors run a mile, this REIT is trying its luck in the US

Can this ASX-listed student housing property trust make it in a difficult sector where others have failed?

Student housing is a very different asset class to just buying blocks in downtown New York, says Auctus managing director Campbell McComb.

Real estate investment trusts are getting no love as rates push higher. And the mere mention of a US-focused REIT would leave many an investor shuddering after the disaster that was the Dixon Advisory URF.

But that hasn’t stopped one plucky little fund manager from sailing against the wind and launching another US-centred REIT, this time giving investors access to US student housing.

Melbourne-based Auctus Investment Group listed its US Student Housing REIT on the ASX in March this year, right around the time that Dixon Advisory’s US Masters Residential Property Fund was flagged for liquidation (that purchase and sale agreement has since fallen apart) and the Federal Reserve began its latest hiking cycle.

The Auctus fund was established to acquire and manage student housing assets close to top-tier public universities across the US. Its assets are currently valued at about $212m.

Auctus managing director Campbell McComb acknowledges the timing of the ASX debut wasn’t ideal.

“The rationale for listing the fund was to get existing investors some liquidity … and the ability to gain extra exposure to the portfolio in the Australian market made sense at the time,” McComb says. “In terms of (the March debut), that was really just a timing of bringing the portfolios together. We started doing the work in October of 2021 and it came to fruition in February. Equity markets weren‘t great then and are probably worse now,” he admits.

Indeed, REITs have been pummelled as investors head for the exit, spooked by rising bond yields and looming property devaluations.

As my colleague Ben Wilmot noted this week, these companies have not reported any operational hiccups. Instead, property values are the central pressure point – REITs tend to come under pressure in economic slowdowns due to a combination of higher rates, lower expected returns and the prospect of declining property values.

Some parts of the sector have been harder hit than others: Property heavyweight Charter Hall is down more than 10 per cent for September, while peer Goodman is off 20 per cent.

Residential developers Stockland and Mirvac are also both deep in the red on the gloomy outlook, falling 10 per cent and 7 per cent in a matter of weeks. This compares with the broader market decline of 5 per cent or so.

Auctus’ USQ, the only listed US student housing REIT globally, is down a more modest 2.5 per cent for the month. But, at $1.16, it is off more than 15 per cent from its $1.38 offer price.

US student housing is more defensive than other segments of the market, and is in a “sweet spot” due to high demand and a slowdown in construction since Covid, McComb says.

“The sector is extremely resilient. Even during Covid the college kids stayed within the student accommodation … the occupancy rate was around 95 per cent. We’ve also got a limited amount of supply and excess demand, which is driving up the rents in the sector.”

The fund targets a 6 per cent yield and its portfolio currently has a 97 per cent occupancy rate.

Still, investors burned by scandal-plagued – now collapsed – wealth manager Dixon Advisory and its foray into the US residential property market might draw the line at another US-focused REIT, even if it is operating in a different segment of the market.

Dixon’s URF was established in 2011 to give investors exposure to the US residential property market in New York. The fund took on substantial debt as it bought up and renovated properties, netting it millions of dollars in fees along the way.

The wealth manager pushed its in-house products, including URF, onto its mum-and-dad investors, in a move the corporate regulator has since determined was not in clients’ best interests.

Dixon later merged with rival Evans & Partners before collapsing. A deal to sell its family property assets was signed in March but fell through just months later.

Dixon’s URF is a very different proposition to Auctus’ USQ, McComb says.

“They were obviously clipping the ticket a number of times along the way in terms of buying the properties and then renovating them,” McComb notes.

“Student housing is a very different asset class to just buying blocks in downtown New York. The recession left a lot of their properties empty, and they had a massive debt servicing issue in the background.”

The majority – 81 per cent – of the student housing portfolio’s debt is fixed for the next five to seven years, giving a measure of certainty and protection as rates push higher, he adds.

“We’re also looking at an enrolment base of 20,000 to 30,000 kids a year, which turns over every three or four years, coming into these properties.

“They all want to live as close as they came to campus … so we look at it as a different asset class to what the URF was in.”

With REITs losing much of their appeal as the outlook darkens, McComb will be hoping investors don’t tune out as soon as they hear the words “exposure to US property market”.