When the school site on Hillside Drive, which is currently leased to Hillside World Academy, was put up for sale on Nov 11, it created a ripple of excitement among boutique private equity players and investors.

“Owing to the property cooling measures, investors have been scouring alternative asset classes, and this site represents a new investment opportunity that’s rarely available in the booming education sector,” says Shaun Poh, executive director of capital markets at Cushman & Wakefield. C&W and JLL are the joint marketing agents for the site at 11 Hillside Drive.

The site has a rich history, as it was the former CHIJ St Joseph’s Convent for nearly half a century from 1951 to 2000 until its relocation to Sengkang. The Archdiocesan Commission for the Pastoral Care of Migrants & Itinerant People subsequently used the school premises to train foreign domestic workers. However, the site was left largely vacant for a decade until it was put up for sale in 2012.

Private equity investment firm Lucrum Capital saw the property as an asset enhancement opportunity and purchased it for $35 million. The site came with a 103-year lease with effect from November 2012. The underlying leasehold title of 999 years (from 1878) for the site is still held by The Lady Superior of the Convent of the Holy Infant Jesus in Penang.

Sited on a rectangular plot of 81,467 sq ft, the property is within the quiet landed housing estate of Hillside Drive, off Kovan Road in District 19. The one- and two-storey buildings, which consist of classrooms, have a total built-up area of 46,752 sq ft and border a central assembly field.

When Lucrum Capital purchased the site three years ago, there were several clumps of big trees obscuring the view of some of the buildings, recalls David Batchelor, director of Lucrum Capital. The fund spent $5 million to refurbish and modernise the classrooms and facilities, as well as on landscaping. The original façade of the 70-year-old buildings was retained because of their historical charm, he says.

Yield play
Based on the purchase price of $35 million, the initial projected gross yield of the property was just 2.5%. However, in addition to upgrading the facilities, Lucrum Capital also obtained the necessary approvals for the site to operate permanently as a school. The lease with Hillside World Academy was signed a year ago, and the school started operating in August this year, following its own renovations. Hillside World Academy was previously known as Chinese International School when it was located on Dunearn Road. “Getting the right tenant is very important, as it will eventually dictate the value of the property,” says Batchelor.

The property is now on the market for sale by expression of interest. Based on the price tag of $70 million, the gross yield will be about 4%, as the lease has built-in step-up rents, says Batchelor. Hillside World Academy had signed a three-year lease, with an option to renew for another 3+3 years. Therefore, the school has a remaining lease of eight years.

The gross floor area of the property is close to 47,000 sq ft, based on the existing plot ratio of 0.6. However, the baseline plot ratio is 1.0, which means the GFA can be increased to 81,467 sq ft. “Therefore, the site presents a lot of flexibility for a school operator and investor looking at future expansion,” says Rohit Hemnani, JLL’s head of corporate capital markets.

Rare opportunity
Such school sites are rarely available for sale, says Hemnani. Sites offered for international schools generally have a maximum lease term of 30 years, with no option for renewal. For example, in May, an inter-agency committee led by the Economic Development Board launched a request-for-interest (RFI) exercise for international schools to bid for three sites with 30-year leases.

The RFI exercise was first launched in 2008 and has been held three times to help ease a shortage of schools for children of expatriates in Singapore. The sites leased out under the exercise are zoned for educational use only. A total of 16 sites had been offered under the previous exercises.

It is believed that more than 20 bids were received for the RFI exercise in May. Many of the bidders are existing operators in Singapore that are on sites with short-term leases, while a significant number are looking to enter Singapore for the first time, says Hemnani. “The biggest barrier to entry in Singapore is the lack of sites, and cost is also becoming a major consideration.”

The average bid price for these 30-year leasehold sites in the recent RFI exercise is said to be $200 million. Typically, the land and construction cost translates into $100,000 per student, says Hemnani. Therefore, the Hillside Drive site looks attractive, as it has 100 years remaining on its lease, and the $70 million price tag translates into $80,000 to $100,000 per student, he reckons.

‘Good prospects’
In Singapore, there is a restriction on local students attending foreign system or international schools. However, the number of international students in Singapore has increased 30% over the last five years. Annual fees for international schools have soared 80% over the same period. Many of the international or foreign system schools are already at over 90% capacity. “The prospects seem relatively good from a demand perspective, and supply is very limited,” Hemnani says.

With school fees ticking upwards and the continuing trend of localisation of expatriates, “for some, international schools have become less affordable”, reckons Hemnani. The Hillside Drive site will therefore be ideal not just for a premium international school but a more competitively priced one too. A number of such schools have sprouted up to provide an alternative option for those who cannot afford the premium ones, he says.

The main appeal of 11 Hillside Drive is that it is an education site with a tenant in place and an immediate income stream, says C&W’s Poh. “And the education sector is certainly booming, unlike the other real estate sectors,” he adds.

Exit strategies
The site on Hillside Drive has redevelopment potential over the long term. Under the URA Master Plan 2014, it is zoned for residential use with a plot ratio of 1.4. That means it could be developed into a low-rise 100-unit private condominium, assuming an average unit size of 1,000 sq ft.

Therefore, property funds could view the property as an investment income play, with an eventual exit by selling to a property developer, says an industry source. Alternatively, developers could view the site as “a land banking opportunity”. “They can enjoy an income stream while waiting for the residential market to recover, and then redevelop the site, as there’s still 100 years left on the lease,” the source adds.

With Hillside Drive up for sale, Lucrum Capital is now looking to raise $100 million for its fourth single-asset fund. The firm generally takes a minimum 10% to 50% equity stake in its projects alongside its investors, who are predominantly high-net-worth investors, companies and family offices. For instance, Lucrum Capital also owns a stake in the Hillside Drive asset. “This gives us a strong alignment with our investors,” says Batchelor.

Past investments included One Finlayson Green, which Lucrum Capital purchased for $145 million in March 2010 and sold a year later to a group of investors for $227 million. It holds a stake in Tuas View, which was developed by Wee Hur Holdings and is considered the largest workers’ dormitory in Singapore with 20 four-storey blocks that can accommodate 16,800 residents. For the fourth fund, Lucrum Capital will look at opportunities in the region as well as Singapore, says Batchelor.

For the potential buyer of the site at Hillside Drive, this could mark a new chapter in investing in an alternative asset class.

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This article appeared in the City & Country of Issue 704 (Nov 23, 2015) of The Edge Singapore.