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Real estate sector wraps its arms around the business of education

Real estate sector wraps its arms around the business of education
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First Published: Thu, Feb 14 2008. 11 49 PM IST
Updated: Thu, Feb 14 2008. 11 49 PM IST
Mumbai: In Mumbai, six-year-old Gauri Karhade goes to a school that is almost 7km from her home. Her mother, Mitali, a classical musician, worries about the child’s safety constantly. The commute generally takes up to 35 minutes but on a bad day, it could take as much as an hour.
“If I had a choice, I would send her to a school that is within our residential complex or at least somewhere close by. Then my maid can fetch her back in case of an emergency, as I travel constantly for my music and may not be at home all the time,” says Karhade.
In Gurgaon, in the National Capital Region (NCR) around New Delhi, one reason for Jayashree Menon’s move to her present home was the proximity to the school that her six-year-old son Nikhil goes to.
“It is a huge relief to me that Nikhil’s school is so close by, given that both my husband and I keep erratic hours, and it is only my old mother-in-law who is at home to look after the child. Besides, it is a much better school than the one he would have gone to from our old house,” says Menon.
More and more people are making home-buying decisions based on the quality and proximity of their children’s educational institutions. And real estate developers and funds are, in turn, wrapping their arms around the business of education. Developers such as Delhi-based Emaar MGF Ltd and Mumbai-based Hindustan Construction Co. Ltd (HCC) have teamed up with different schools for the township projects they have announced.
While Emaar tied up with Singapore-based Raffles Group, HCC has teamed up with the Girl’s Day School Trust, UK, for its new hill station project in Lavasa, near Pune. Pune’s Magarpatta City has tied up with Vidya Pratishthan to set up the Magarpatta City Public School.
The Baramati-based Vidya Pratishthan is promoted by Sharad Pawar, Union agriculture minister.
Some foreign universities such as Oxford University and the Georgia Institute of Technology in the US are also looking at setting up shop in India. Oxford will develop a range of custom-made and open executive education programmes that will be available at its India centre at Lavasa. A study of companies located in India and elsewhere is under way to begin development of these education programmes, which will first be delivered in early 2010, according to the Lavasa website.
The Georgia Institute of Technology has signed a memorandum of understanding with the state government of Andhra Pradesh to develop two campuses in the state: a 20-acre campus near Hyderabad and a 470-acre campus near Visakhapatnam.
Given the promise of private education, which is more expensive and aspirational than government-funded schools, several real estate players, including funds such as Kotak Realty Fund, are looking at educational infrastructure as a possible investment opportunity.
Trikona Capital, a Delhi-based realty fund, for instance, plans to dedicate around 10% of its new $1 billion (Rs3,970 crore) fund Trident to investments in the sector.
Mahesh Gandhi, president of Trikona Capital, says: “We see a lot of opportunity in the social infrastructure sector in the coming years. We have already invested in hospitals, now we are looking at schools.” Trikona has invested around $18 million in Fortis Hospitals Ltd, which is building a chain of 40 hospitals across India.
Gandhi says he has already invested close to $5 million in educational infrastructure across the four different townships that the fund has invested in so far out of its current fund.
Although the Kotak fund has so far made no investments in the sector, it is looking at the sector seriously, says the fund’s chief executive officer S. Sriniwasan. Another fund looking at investing in the sector is the Europe-listed Yatra Capital. Ajoy Kapoor, managing director of Yatra Capital, confirmed that the fund was looking at investment opportunities in education infrastructure but declined to elaborate.
Meanwhile, different models of investment are emerging in the sector.
One is a build-and-rent model where the school is a service provider, while the other model in operation is where the school infrastructure is paid for by the residents of an area.
“What we will see is the emergence of several service providers who will tie up with developers and funds to develop the infrastructure and rent it out to them. While several models will evolve in the future, the nearest approximation we have as of today is the hospitality industry, where the developer builds the hotel but gets in a hotel chain to manage it,” says Kotak’s Sriniwasan.
He points out that the largest component of capital cost of setting up a school or a college is the real estate involved—25-30%.
“This is a dampener for most schools because they operate as trusts under existing government regulations with capped fee structures. Although there is a paucity of educational institutions in the country, the current regulations prohibit schools from expanding their footprints to serve this need,” he says.
India has one of the lowest public expenditures on education per student at $406, while China’s is $2,728 and Brazil’s $3,986. India also faces a severe shortage of schools, teachers and teaching assistants.
But, this is also where Sriniwasan sees the investment opportunity. “We acquire the land and build the buildings and provide other infrastructure like audio-visual aids. And the schools come in as service providers,” he says.
Kotak is considering investments not just in the integrated townships but also outside—tie-ups with private universities that are looking at expanding their footprints.
Both Gandhi and Sriniwasan say that as funds they would typically rope in developers and facilities managers to construct and manage the buildings and equipment while charging the school or college rental for the use of the premises.
“This rental then can be charged by the school as part of the fees,” says Sriniwasan. The rentals would typically constitute 10-15% of the fees charged by the school, he says.
The other investment model that has emerged so far is that of Magarpatta City in Pune.
“We are not charging the school any rental as we wanted to keep the fees low and affordable even to children in the vicinity of the township. We have handed over the premises to the school and we maintain it for them out of a small amount that has been set aside. The cost of the school premises is included in the price of the flats that are sold within the township,” says Sanjay Magar, chief executive officer of Magarpatta City.
It is not only the real estate funds that are eyeing the opportunity.
Beacon India Partners, a private equity fund that has invested across several sectors, also plans to get into the educational infrastructure business. While several private equity players have invested in the online education business, Beacon plans to get into the physical infrastructure for educational institutes.
“We are looking primarily at the kindergarten and post-tertiary levels, where there are no government regulations or caps on fees. We will also look at investing in professional training institutes such as training academies for the civil aviation and financial services sectors,” says Deepak Shahdadpuri, a partner in the firm. The model the firm is looking at, is similar to the build-and-rent model that Kotak’s Sriniwasan described.
Shahdadpuri said the firm would look at investing in companies developing such infrastructure.
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First Published: Thu, Feb 14 2008. 11 49 PM IST