University of Dundee PFI scheme deemed ‘unsustainable’

Institution looks for new business model to pay for halls of residence

August 21, 2014

Source: Alamy

Erosion: projections indicated that financial stresses could emerge by 2020

“Unrealistic” student rent forecasts have forced a university to rethink an “unsustainable” £56 million private finance initiative used to build four new halls of residence.

According to its academic court minutes, the University of Dundee is looking for a new business model to help it pay off the debts it incurred when it built its Belmont, Heathfield, Seabraes and West Park halls.

Under the scheme set up in 2003, Dundee created a joint venture company with Sanctuary Housing Association and the Bank of Scotland, and borrowed money from the bank to build student accommodation.

As part of the move, Dundee Student Villages also took control of the university’s existing housing stock.

But DSV has now admitted that its plan to pay off its debt is “unsustainable when projected into the longer term” as it is dependent on raising student rents annually by inflation plus 1 per cent for 35 years.

The company board members considered this approach to be “unrealistic in the context of affordability to students and the oversupply of student accommodation in the city”, according to minutes of the Dundee academic court meeting held in April.

“Projections reviewed by the board indicated that stresses in the [financial] model would emerge around 2020 under a number of scenarios,” they add.

There have already been complaints from the Dundee University Students’ Association over rent hikes in Dundee. Last year its student paper claimed that room prices were the most expensive in Scotland.

The concern over DSV’s business model is likely to be noted by other universities that have set up similar “special purpose vehicles” to build and run student accommodation blocks.

The universities of Edinburgh, Keele, Hertfordshire and Sheffield have all established special purpose vehicles to finance major accommodation projects, while others have raised money to fund student housing through the bond markets.

But the business risk in these student accommodation deals is higher than similar private finance deals arranged by schools and hospitals because of uncertainty over future rents, the credit ratings agency Standard & Poor’s has warned.

“There is no guarantee that rental levels will continue to rise at or above the retail price index during the entire project’s life,” it says in a report published last August.

Student number fluctuations, tightening of visa entry requirements and further higher education reform could also reduce demand for student rooms, “especially at second-tier universities”, the agency said.

Concerns about DSV have been previously raised by the University and College Union, which said that it was worried about the year-on-year deficits incurred by the company.

DSV’s latest accounts show that it registered a combined deficit of £1 million over the past two years. It had liabilities of £56 million, tangible assets worth £40 million, and other assets worth £6.5 million.

However, “accounting losses are expected in the first years of operation” and are “in line with the original financial model”, Dundee’s 2012-13 accounts state.

A Dundee spokesman said that DSV was “established to provide £40 million of new residences for the university, giving students some of the best quality accommodation in the UK”.

“It had produced financial results which are ahead of the university’s expectations, set back in 2004,” he added, saying that the residences were “extremely popular with our students and occupancy rates have been consistently high”.

“As with any long-term project, there are regular ‘health checks’ on its status and reviews of the workings of the scheme,” he added.

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Reader's comments (1)

Sadly the 1% over inflation clause will have been used to sweeten the financial model and this is a common rip off within many PFI contracts. One might debate RPI/CPI as alternatives although earning would be a more realistic reference point being linked to capacity of those paying: parents / students. Earnings over a 35 year span should be going up and hopefully faster than inflation.

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