How to raise your sites

March 26, 1999

Universities need top-class facilities to support learning and attract staff and students. Keith Blake examines the options available to raise capital and improve campuses

There is a palpable sense in which the culture of university staff and their fee-paying students accepting poor facilities in universities is on its way out. Universities increasingly are expected to provide quality built facilities to support first-class academic teaching and research.

Concerns over sub-standard halls of residence, unsatisfactory teaching accommodation and inadequate research facilities are regularly and publicly aired, often quite forcefully. The fact that student applications to some colleges are falling while others are rising may reflect the quality of both the academic provision and the environment. It may well be that those universities with funds for building improvements are more appealing to students and staff.

Parents who will have to pay more will encourage their children to apply to universities where the facilities as well as the teaching are of the highest standard. They may reject obsolete and inferior accommodation.

In terms of estate development, as universities become acquainted with a more competitive environment and experience more financial pressure, they will be denied the saviour of inflation to support investment. The UK is moving into a low-inflation, low interest-rate era that could last for a whole generation, especially if Tony Blair persuades us to join the European single currency.

While the benefits of inflation have always been illusory, a low-inflation economy could ultimately allow universities to use their buildings in a very different way. They could use them as security for raising capital that can be used to attract domestic and international students and staff and allow improvements to physical facilities.

What are the financial structures that may well become commonplace in a low-inflation era? The new structures that are coming to the market have been developed as by-products of well-established property investment vehicles that have been successful in the US over many years.

These are based on financial vehicles known as real estate investment trusts and structured/ securitised funds that allow owners, in many cases, to retain the freehold ownership of their buildings and at the same time raise capital to the full value of the property itself. The loan is based on the financial strength of the underlying occupier rather than the value of the bricks and mortar. This change of emphasis has big advantages over conventional mortgage or sale and leaseback arrangements.

As an alternative, and as the private sector now works very closely with higher education, it may be possible to establish a joint-venture company on a 50:50 basis, which would enable sufficient new capital to be raised without having to sell assets. The key for the university authorities is to keep control of their properties, allowing them to adapt to changing needs over the years without any constraint from another party.

The more traditional route of selling a building and renting it back is well tested in the UK commercial property market, but over the past 20 years many owners who then became tenants have regretted their decision because of the highly inflationary rents that have subsequently been required. Leasebacks could well become an attractive option to the education sector if low inflation stops rents from escalating out of control over the term of the lease.

It may be possible to arrange all these structures on the basis that the assets are taken off the balance sheet, which may be seen as an advantage.

By adding quality and value in the form of better facilities, paid for by the capital raised from their buildings, a university will be able to increase the revenue return from the campus. This might involve increasing lets of student accommodation, promoting conferencing facilities to the private sector and allowing a sports facility to be used by private clubs and the public at large.

Improved facilities will also come from much closer scrutiny of the use of university land and buildings. Indeed, it is becoming an established practice for an institution to rationalise its holdings where its sites could be released and developed for more valuable alternative uses.

The University of Hertfordshire has rationalised its property assets over the past seven years, investing more than Pounds 50 million in building and refurbishing properties while disposing of others. Hertfordshire, formerly Hatfield Polytechnic, has grown from 7,000 students in 1990 to 19,500 today. In that time it has been advised by chartered surveyors Fuller Peiser on how best to fulfil its goal of upgrading facilities.

In recognition of technology's impact on information transmission and learning methods, the university merged its central computer and library resources into a learning-resources centre. The Pounds 16.8 million building, completed in 1997, provides more than 850 workstations and is, for most of the week, open 24 hours a day, reflecting the dynamism of a modern university.

This active asset management has also included building a new Pounds 6m art and design building with an outstanding gallery and facilities for 900 students studying subjects from art therapy to virtual reality for the film industry.

As the higher education sector enters the 21st century, issues of estate quality are expected to climb up the agenda, and university administrators may well be spending a good deal more time with financiers in the future as they provide a physical environment conducive to excellence in learning and research.

Keith Blake is executive chairman of property consultant Fuller Peiser.

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