VBI Real Estate is pursuing an emerging real estate strategy in Brazil: student housing.
The São Paulo-based real estate fund manager has acquired a majority stake in Uliving, a local student housing operator, and plans to invest additional capital in the firm to further build out Uliving’s management team, IT systems and branding.
The latter firm, founded in 2011, currently manage five student housing properties with 563 beds and is expected to add two more assets to its portfolio this year, which would bring a total of 900 beds under its ownership. Through its partnership with Uliving, VBI plans to own and operate more than 1,000 beds by the end of the year and 5,000 beds, or approximately 20-25 properties, by 2020.
Properties would be located in São Paulo, Rio de Janeiro and other major cities in the south and southeast region of Brazil. The investment pipeline will come primarily from acquiring and redeveloping residential buildings owned by absentee landlords that lacked the management or organizational skills to maintain high occupancy levels, as well as limited service hotels, a sector that became overbuilt in the lead-up to the 2014 World Cup and 2016 Olympics and consequently has suffered from high vacancy levels and low room rates.
“The overbuilding not only created a supply of buyable new hotels with low occupancy level, but also a supply of older hotels for sale,” said Ken Wainer, founding partner at VBI. “The older hotels are suffering from the competition from the overbuilding of new hotels. They can be retrofit and converted to student housing.”
Wainer noted the pent-up demand for student housing in Brazil, which has the world’s fourth largest university population, with more than 8 million undergraduates, 3.3 million of which study outside of their hometowns. Given the dearth of university-owned housing in Brazil, out-of-town undergraduates typically live in improvised student accommodations, such as rented apartments, fraternity-type housing, student hotels or with relatives.
Other Brazil-focused private equity real estate firms had multiple reasons for not having invested in the nascent real estate strategy to date. They included projected returns that were significantly lower than its 20-25 percent target and therefore not attractive for a long-term commitment in the country; the difficulty of achieving scale in the strategy and liquidity.
Wainer, whose firm is targeting internal rates of return in the mid-20s and 2-3x multiples in the sector, acknowledged that “the economics of student housing don’t work if you pay the market price for land and build something new.” However, VBI and Uliving’s strategy would be to buy and repurpose existing assets at 50-60 percent of replacement costs and complete the retrofits within 12 months, thereby avoiding the development J-curve.
Wainer also believed that achieving scale in the strategy would not be an issue, because of the current size of the Brazilian university population and its 6 percent annual growth rate: “If Brazil does not have the scale for student housing, few markets do.” As for liquidity, he said that exit options would include a local real estate investment or trade sale.
VBI was founded in 2006 by Wainer, Rodrigo Abbud and Rodrigo Sarti. In 2008, the firm raised its first real estate private equity fund, the $183.8 million Brazil Real Estate Opportunities Fund I, focusing on development in the office, housing and shopping center sectors. In 2011, the firm raised $500 million for its second fund, Brazil Real Estate Opportunities Fund II, targeting the same sectors.