The Saudi educational sector: Where are the opportunities?
In part five of my series of articles on the Saudi educational sector, I conclude with my thoughts on an investment opportunity to take advantage of the long-term financing needs of the education market via real estate investment trusts (REITs). A REIT is a fund that invests in income-generating real estate properties.
Saudi Arabia’s REIT market is currently dominated by non-thematic REITs as 67 percent of listed REITs have their assets spread across more than one sector. This can be partly explained by the lack of institutional-grade assets available with long-term sustainable income. While sectoral growth in education is high, there still remains a challenge for private schools to effectively address the key parameters required for this growth.
Some of these key parameters include investment in infrastructure, content creation, technology, safety, regulatory compliances and hiring and retaining high-quality staff. All this requires patient capital, but one of the fundamental issues that private schools face today is the lack of long-term capital to meet their needs.
REITs provide convenience to school owners to monetize the physical assets (land and building held in a special-purpose vehicle, or SPV) of a school while continuing to use the premises for running the school operations. The REIT buys the land and buildings of the school and leases them back long-term to school owners. The sale proceeds are used by the school owners to repay their debt, if they have one, and fund their expansion plans. Hence, for the school, there is no principal repayment in the REIT structure. Instead, they are only obligated to pay monthly rent which is at times more competitive than the interest costs, depending on the cash flows and credentials of the owners.
This asset-light model eases the cash flow burden of school owners, allowing them to focus on their core strength — improving the quality of education by investing in staff, facilities, safety and compliance. This is as well as expanding operations to take in more students, running a tight ship financially that will lead to higher value creation, availing themselves of a structure that gives them liquidity and, ultimately, enhances their brand and valuation.
I highly encourage school owners and operators in the Kingdom’s educational sector to explore REITs as financial solutions which will serve their needs in a holistic manner and provide much-needed long-term capital. Education-focused REITs are a proven model which bring global best practices, enhanced corporate governance and long-term returns for investors.
• Basil M.K. Al-Ghalayini is the Chairman and CEO of BMG Financial Group.