The Government’s public spending plans are having an impact on universities’ property teams. Mills & Reeve real estate associate Christian Bull looks at the conflicts, pressures and opportunities faced by such institutions.

Straightened times

All areas of the public sector are having to tighten their belts. In 2010, the Department for Business, Innovation and Skills (BIS) announced it was responsible for achieving savings of £836 million from an overall £6.2 billion target. As part of the £836 million, £200 million was to come from the HE budget (although the 2012 autumn statement did announce extra money) showing that no education institution is immune – including these bodies’ property departments.

Belt tightening v other continued pressures

Many university estates and finance directors face conflicting pressures. There is a need to contribute to the savings outlined above – the overall fall of 58 per cent in capital funding from HEFC in 2011 to 2012 exacerbates this – while continuing to improve their estates (and in many cases address a serious maintenance and repair backlog).

This is in the face of increasing student numbers (figures released by UCAS at the end of January 2013 showed that the number of applications for higher education in England have risen by 3 per cent year on year. Applications from outside the EU increased by almost 10 per cent despite recent visa problems, unlimited recruitment of AAB A-level students), certain places and courses being cut, student demands for high quality, modern facilities and accommodation and the "greening" of university estates with the emphasis on sustainability, carbon reduction and BREEAM ratings.

The need to maintain and improve university land and buildings and comply with evolving legislation does not cease in straightened financial times. The impact of tuition and top-up fees has meant that many students are more discerning in terms of the institution they attend. The quality of a university’s estate and facilities, and its accommodation in particular, means that there is an increased marketisation and commercialisation of the university estates arena. Students have a growing expectation and a desire to "shop around" and this includes the very best estates, accommodation and facilities in an increasingly competitive HE market (both nationally and internationally) – all in the shadow of public spending cuts.

The Government’s view of universities

It is no coincidence that universities have remained in BIS rather than the Department for Education. This reinforces the trends of competition, marketisation and commercialisation. The minister for universities, David Willetts, has regularly referred to the importance of universities forming partnerships with business, citing spin-out companies, science parks and research/industry centres at various universities in the Midlands and elsewhere as examples. It highlights the need for universities to be flexible in terms of their estates.

How can university property teams benefit from this?

Opportunities

Directors of estates and finance, do not despair! Universities are uniquely placed in being able to best meet the above challenges and demands. Often many institutions have large scale sites in prime real estate city centre locations with a high capital value. The "asset rich" nature of a lot of university land and buildings is helped by the fact that they are often not mortgaged and are generally in either freehold or leasehold ownership. University estates, finance and management teams should explore ways to get the best out of what they already have. This could involve:

  • Developing links to business and industry as mentioned earlier

This could be via science and business parks and joint ventures with private companies, commercial developers and retail organisations. This accords with the government’s desire to enhance links between universities, business and industry. Universities might want to think about becoming a commercial landlord via a joint venture with a developer or a local authority to build mixed use schemes. Universities can either benefit from an income stream but bear the potential risk of voids from commercial units, or lease the commercial parts to a commercial landlord. Joint ventures may also extend to those between universities to, for example, develop a joint campus and shared services.

  • Explore retail possibilities

Do you really need the ground floor? Retailers are increasingly looking for smaller units and shared costs. Several universities combine their teaching and courses with facilities open to the fee paying public such as hairdressing, catering, etc all as part of a "learning village".

  • Better space utilisation

Think about a commercial use for existing facilities such as sports and leisure land and buildings. Can they be hired out? Lecture theatres, seminar rooms and accommodation (out of term) can be used or brought up to a suitable conference centre standard so that they can be hired out for a financial return.

  • Take it in-house

American universities have been particularly successful at running and operating estates services themselves such as catering, security and maintenance. In turn they benefit from cashflow and savings. This can be in contrast to the British tendency to "farm out" such services to private companies who receive the financial proceeds.

  • Dispose of unwanted and surplus land and buildings

This can take numerous forms such as selling the freehold for a capital receipt, granting a long leasehold and sale and leasebacks. Sale proceeds can be used to bring down any debts and to finance estate improvements. As with any options there are advantages and disadvantages. While property values are not generally high at the moment and universities may not be able to use the land that is the subject of a long leasehold, this may not be problematic for surplus land.

  • Borrowing and investment

Lending overall may be low but universities are still seen by banks as one of the safest and most desirable borrowers. Similarly, the number of private investment funds interested in investing in university facilities and student accommodation is on the rise.

  • Public funding

Despite public funding cuts, money is still available. Further and fuller exploration of opportunities from bodies such as BIS and its associated organisations should be made and kept under regular review. Recent examples include the £300 million Research Partnership Investment Fund to develop new research centres at universities across the UK. The trend seems to be towards more focused, earmarked funding for specific schemes and areas – estates teams should remain alive to this. As this form of targeted, ring fenced funding is likely to increase in an era of shrinking public funds this should be borne in mind when estate planning.

  • PFI

Although controversial, many universities still recognise that this can be an option, particularly for student accommodation. While this has traditionally been used to fund residential accommodation, it is sometimes being implemented for other parts of the estate, for instance certain universities have extended this to new lecture theatres and faculty buildings. Some initiatives involve a range of private companies taking responsibility for parts of the infrastructure. Often in the context of accommodation, while a university will not benefit from a rental income from students (usually the company will), the university has the benefit of retaining ownership of the building with the private company taking a long lease, the rental receipts and responsibility for building, financing and operating the structure.

  • Philanthropy and alumni associations

This is currently a mixed picture with some UK universities better at fundraising than others. US institutions use this model to (partly) fund estates budgets and enhance their estates for example, involving benefactors of buildings such as student unions, libraries and teaching blocks/facilities.

Flexibility and innovative thinking is going to be the key to meeting the challenges of modernising and maintaining estates to remain competitive in the context of public spending cuts. While no one size fits all, with some radical thought estates can help universities to provide a way out of depending on public funding.