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Educating real estate: Kayne Anderson eyes the public university sector

The New York-based firm has $95m of dry powder ready to target deals in 2010. Off campus housing near public US universities will be the firm’s primarily focus, as it deploys capital from its first institutional fund.

Consumers in the US are on the lookout for bargains. However, for price-conscious households it’s not just about cutting their shopping costs – it’s also about keeping an eye on the essentials, including their children’s college education.

With unemployment having reached the 10 percent threshold and the cost of a four-year college education in the US increasing on average by 5.5 percent for the 2009-2010 academic year, families are increasingly turning to the publicly-funded, state sector to educate their children. Indeed, this year states across the US reported record increases in enrollment at their public universities.

For Kayne Anderson Real Estate Partners this is all good news, with the New York-based private equity real estate firm investing in off-campus student housing at public universities, where enrollment is above 20,000.

What we expected to see happen over a five-year period from 2009 though has taken just one.

Al Rabil, managing partner, Kayne Andersn Real Estate Partners on shifting enrollment from private to public universities in the US

As managing partner Al Rabil told PERE: “We’re very bullish on our slice of the world.”

After closing its first institutional real estate fund, Kayne Anderson Real Estate Partners I, on $136 million of commitments in March, the firm now owns 12 properties in six states.

Rabil though says the firm is gearing up for 2010, with $25 million of equity “soft committed” for deals in the first quarter of next year and another $20 million set aside for potential acquisitions in the second quarter.

Recapitalising distressed sellers is one strategy the firm is employing, according to Rabil, with the firm looking to invest around $50 million of equity for an 80 percent stake in various student housing properties with the founder of a regional development firm.

“When we launched KAREP I in 2007 we expected to see enrollment shift away from private university education towards public institutions. What we expected to see happen over a five-year period from 2009 though has taken just one,” Rabil said of the sector. But it’s not just about unemployment levels, Rabil added. “It’s about a family’s prospects for earnings in the future.”

And when the average annual cost of a four-year degree at a private university for the 2009-2010 college year was $26,273, paying more than $100,000 to send one child to private college becomes a real economic issue for many, especially when accommodation and other costs are taken into account. According to the not-for-profit group, the College Board, the cost of a public four-year degree was $7,020 for the 2009-2010 academic year.

“You have to be cognisant that parents will be more price conscious going forward,” said Rabil.

However, as Rabil noted, even with recession-resistant sectors, such as student housing, “nothing is recession- or bullet-proof.” States are also looking to cut their own costs with many public university budgets slashed for the coming years. “It means you become selective over where you invest and what you invest in and make sure, as always, that the location is compelling.”

Kayne Anderson also invests in some multifamily assets, as well as self storage, medical office and senior living properties.