That university debt problem is a big issue off the balance sheet too

But there’s another aspect to the campus infrastructure story that is starting to bite.

Prior to 2018, HEFCE was charged with ensuring that providers in receipt of public funds offered value for money, and were fully responsible for the use of these funds.

As DK notes, one of the things that got swept away when England’s funding council was replaced by a market regulator was this rule:

The risks and affordability of any new on- and off-balance sheet financial commitments must be properly considered.

And if the risks and affordability of financial commitments were signed off in the old days, the past is a foreign country. They evaluated such commitments differently then.

Just the other day, universities minister Jacqui Smith said:

I think it is fair to say that there is a challenge in HE around governance and ensuring that some of the things that have either slipped off the table in terms of real, high level governance consideration, or where short term decisions are not in the best interest of the sector or the or the institutions are being taken.

Did she mean the sort of deals where universities play the hyper-competitive facilities arm’s face by selling what they have to get shiny things built? Maybe.

Hard hats

I’ve long been queasy about sale and lease back deals or their ilk. If nothing else, they often represent a fire sale of assets that were funded by the public and/or students.

The theory has been that universities no longer getting large wads of HEFCE capital funding can sell off things like ageing student accommodation while securing long-term lease agreements, unlocking capital for other or urgent priorities – campus modernisation, digital infrastructure, or (sometimes) just covering budget shortfalls.

In theory, the approach allows universities to sidestep the risks associated with property ownership – like fluctuating maintenance costs and unpredictable student demand – while maintaining access to essential assets.

Plenty of presentations have been made to university councils and boards of governors on the win-win – universities gain immediate liquidity, and investors secure a stable, long-term revenue stream from a growing student market.

Until they don’t.

Off-balance sheet

Let’s imagine you’re one of the many universities that was looking at its student accommodation portfolio a few years back – you probably figured you needed more rooms, you probably reckoned that the rooms you did have were in dire need of a lick of paint, and you probably didn’t have the cash to do this yourself.

A sensible country would have put the investment in to such assets. But this is a country that’s been selling off its assets in exchange for cash for decades. Many universities just joined in.

Some sold off some or all of their halls to companies specialising in sale and lease back, some got new rooms funded by similar companies, and some did both. Sometimes universities became part-owners of these special purpose vehicles. The deals have varied in length – but usually involve long term commitments, via either first dibs on the rooms, or in some cases underwriting the rent to come in from those rooms via an inflationary ratchet.

For the private sector, there’s money to be made. Private developers signed a record 22 land deals for purpose-built student accommodation in 2024, totalling £473 million, according to a new report from Knight Frank.

This report says that universities are increasingly partnering with developers to build new student housing as “developers secure cheaper land and universities guarantee occupancy by directing students to these accommodations”, as well as purchasing existing housing assets from universities:

Universities own about £30 billion of real estate. We couldn’t do it in one go, but over 10 years there’s an opportunity to provide funding into the sector using our access to private capital.”

These deals probably looked exciting when the Powerpoint was beaming up the artists’ impressions – but a few years on, many are starting to look like a real worry.

That fundamental reshaping of student demand – sucking the more mobile domestic students up the league tables into a bigger Russell Group – leaves lots of other providers with more commuters than ever before.

Overall student number and income holes everywhere else have largely been plugged via international PGT recruitment – but one of the things that’s starting to emerge in accommodation is how much more price sensitive students are from the countries we’ve been expanding in.

Couple that with home students’ maintenance loans falling behind inflation – starting to choose local (or choosing to regionally commute rather than rent) – and you soon end up with empty beds.

Big firms like Unite aren’t daft:

Unite Students (UTG) has sold six properties to PGIM Real Estate for £184m (UTG share: £76m), as it continues to focus on student accommodation close to highly ranked universities.

Unfortunately, lower-ranked universities and the SPVs that own and control chunks of their housing now don’t really have that option.

Bond villains

Often the money raised in an SPV is via an issue of bonds. “Senior” bonds are those that get repaid first before any other debts if the SPV ever faces financial trouble or bankruptcy. This makes them less risky for investors, often leading to lower interest rates than junior debt.

“Secured” bonds are those backed by specific assets as collateral – in many cases, the accommodation itself. If the SPV can’t repay its debts, bondholders get the right to take control of these assets or force their sale to recover their money. It reduces risk for lenders – but increases pressure on those SPVs to maintain financial stability.

“Index-linked” bonds have interest payments (and sometimes the principal) increase over time in line with inflation – sometimes the Retail Price Index (RPI), sometimes the Consumer Prices Index (CPI) – but basically, as inflation rises, those SPVs have to pay more each year to bondholders. That’s a key financial risk – if inflation rises significantly, the debt repayments become much more expensive.

If inflation rises significantly, that also means more familiar things – the costs of maintenance go up, and if student finance falls behind inflation, so does rent as a proportion of expenditure. All at the same time that your international students are becoming more price-sensitive and more difficult (morally, if not financially) to extract more rent from.

Herts beds bucks

Here’s an example. UL@H is a special purpose vehicle that issued £143.5 million of senior secured index-linked bonds (due July 31, 2054) to finance the development of student accommodation buildings at the University of Hertfordshire’s College Lane campus in Hatfield.

The 50-year project agreement sees the university paying UL@H an annual lease fee, the amount of which depends on how many of the available rooms it wants to reserve for use in the forthcoming academic year. If the university decides not to reserve 100 per cent of the rooms, the project can market the remaining rooms on its own. The university then passes on facilities management and major maintenance (life cycle) risks to an outside company.

But lower student recruitment in the current academic year and declining applications so far for the 2025/2026 academic year means that the university has only “nominated” 85 per cent (compared with 97.3 per cent currently) of the rooms from UL@H. And while the project can market the nonreserved rooms, who to exactly?

The thing about student accommodation is that it can’t really be rented to anyone else.

S&P’s Global Ratings services analyses the problem as follows:

We now expect UL@H’s minimum debt service coverage ratio (DSCR) to weaken to 1.27x from 1.32x because we think it will be challenging for the project to achieve occupancy levels in line with historical numbers at least in the short to medium term.

The negative outlook indicates that we could further lower the issue rating by at least one notch if UL@H’s minimum DSCR deteriorates further because of lower demand rooms and the inability to adjust rents above inflation in the next few years, or if the project’s cash flows rely further on marketed rooms.

This ends up being a rents issue. For the current academic year, UL@H agreed with the university to increase rents by 5 per cent – but S&P says that that represents a gap of about 1.5 per cent between the bond inflation indexation and rent adjustments that needs to be recovered in the next years with above-inflation adjustments.

S&P says it might revise up the outlook optimistically, but only if:

• Nominations hold up -”the new Medicine course at UoH could contribute positively”
• The inflation mismatch could be materially reduced (increasing rent significantly above inflation in the next two years)
• Increasing market share/occupancy by persuading more students to rent these rooms than the alternatives

On that last one, it seems to think that the Renters’ Reform Bill could cause more students to choose these halls as their first choice. But there’s just as much chance that landlords are crying wolf, and students will clock that their rights will be much better in off-street houses than halls – and so will choose houses instead.

Essex is in a similar pickle. S&P says that the operating performance of student accommodation projects Uliving@Essex Issuerco PLC (Essex1), Uliving@essex2 Issuerco PLC (Essex2), and Uliving@Essex3 LLP (Essex3), have been “far less resilient” than it originally anticipated under more “volatile and uncertain market conditions”:

We believe the projects will remain exposed to the consequences of the U.K. government’s restrictive immigration policies and the country’s cost-of-living crisis affecting mostly international post-graduate and first-year undergraduate students at the University of Essex. We think these trends contribute to lower accommodation nominations by UoE, which leaves the projects financially exposed.

This Augars badly

Of course what’s interesting about many of these deals is that to the outside world, they just look like increasingly expensive university student accommodation – but it’s accommodation that even if it was minded to, universities have much less ability to limit rent increases over than in the past.

That’s then exacerbated by falling demand – and unless you think the immigration rules are about to change to cause demand to go back up (and as I keep saying, it’s not clear that it was the immigration rules that has caused the reductions), all you have left is student numbers distribution.

And that’s the university PFI stuff. Look around at the country’s university cities and towns – many have swapped office blocks that homeworkers don’t want, and retail that has moved online, for student housing – and much of it is financed through deals of this ilk. The legal vehicles either need the savings of families in the global south or the student debt of domestic students to pay out to their investors. Neither can afford the sorts of rents required to keep some of those deals going.

Back in 2019, Phillip Augar’s Review of Post-18 Education and Funding rather naively argued that universities “retain a responsibility for overall student welfare and delivering value for money” and that that “extends to university accommodation, whether or not they are the direct provider”.

He thought that the public subsidy of student maintenance, much of which is spent on accommodation, gave the Office for Students (OfS) a legitimate stake in monitoring the provision of student accommodation in terms of costs, rents, profitability and value for money:

The government should … provide a clearer picture of private sector involvement in student accommodation by commissioning a comprehensive financial analysis of private developers and operators of purpose-built student accommodation to understand the profits that private business and investors are making from student rents.

That was, of course, in Chapter seven: A post-18 maintenance system – the chapter that the government of the day just pretended had never been written when it published its response. The current government should pick up that recommendation – and fast.