What foreign investors are learning from China’s education sector

A shortage of opportunities in core real estate sectors is forcing Australian investors to look at alternative asset classes.

July 31, 2018

Foreign real estate investors have recognized the opportunity.

Expanding Chinese affluence has pushed up demand for English-language education that aims to help youngsters get into internationally-renowned universities in countries like the U.K., U.S. or Australia. Around 60 percent of children enrolled in China’s international schools are Chinese citizens, according to ISC Research.

Schools sprouting up around China have sparked interest among investors, who have been branching out into less-trodden real estate sectors in a hunt for yield. These so-called alternative sectors – including education, data centers, student housing, and health care – typically offer much higher returns than traditional real estate like offices or retail.

“The interest in English-language education in China is only going to keep growing,” says Noeleen Goh, National Director – Alternatives, Asia Pacific at JLL. “This is a new opportunity for investors.”

So far, independent British school brands have dominated, in part because the U.K. curriculum has been highly sought-after. For instance, Westminster School has plans to open six campuses across China by 2028.

However, groups from other countries have also started to make a move.

“Although the heritage of the British independent school attracts many investors from China, others are also now looking to the quality school brands from Australia, Canada and the United States to bring alternative learning options, and direct pathways to their best universities, to the aspirational families in China,” says Richard Gaskell, Schools Director at ISC Research.

Investment has been rising among companies that run international schools, which also have backing from operational investors, private equity firms and pension funds. A big draw for investors: a sector with long-dated leases, making it less-prone to market volatility compared to more traditional property assets.

In addition to having six international schools dedicated to expatriates in China, Hong Kong-based Nord Anglia Education, owned by Canadian sovereign wealth investor CPPIB and Barings Private Equity Asia, opened a school in Shanghai accepting local Chinese students in 2016. The group has plans to open another in Ningbo later this year.

Investing in this emergent sector isn’t necessarily straight forward. However, there are two types of schools in China that foreign groups can explore.

First are International Chinese-owned Private Schools (ICPS), which law requires must be fully Chinese owned. But these schools can form business relationships with overseas investors. Examples include Haileybury and Malvern College.

The other option is through Sino-Foreign Cooperative Schools. These are joint ventures between a Chinese owner and a foreign-education operator focused on secondary and higher education.

Typically, the foreign organization does the teaching, while the Chinese partner provides the land and financial investment. U.K.-based Dulwich College has set up programmes in Zhuhai and Suzhou with this model. This route is less common, but it provides the possibility of direct investment and majority ownership.

“There is red tape here that investors need to be aware of,” Goh says. “But, to be honest, this is a growing sector, and is only going to become more mainstream.”

Why is alternative real estate a long term strategy?

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