University of Kent Finance and Resources Committee

University of Kent Finance and Resources Committee 20 March 2009

Proposal for new residences - F2008/18 (iv) contd./

University of Kent Finance and Resources Committee

20 March 2009

Proposed new build student residential accommodation

1. Background

At the January meeting of the University Council, held to discuss the emerging Estates Strategy, there was some support among the members to build further student residential accommodation - the current provision consists of some 4,300 study bedrooms. It was suggested that the University’s competitive position would be enhanced by offering accommodation to overseas fee-paying students for duration of study, to increasing postgraduate numbersand, possibly, undergraduates for a second year. It is also clear that for 2009 entry, there will be some difficulty in meeting demand from those guaranteed a place under the current allocation policy. Partly this reflects the high levels of recruitment in 2008 when some 200 students had to be placed in off campus accommodation and were promised a room on campus for next year, adding to the usual guarantee group. As a result, those returning from a year abroad are being offered head leased accommodation off campus as a means of meeting the promises given last September.

It is also clear that there are housing pressures within Canterbury that mean that the City Council would be keen for us to accommodate more students on campus.

While the wider economic situation is uncertain, current accommodation pressures and our response to potential future UK Government funding reductions, requires us to now consider our future mitigation strategy and market position.

2.Allocation policy

The University currently offers to accommodate all new undergraduate students[1] – typically the take up is from 82% - foundation flow-through applicants and, from September 2008, all postgraduate students[2]. Additionally, spaces are offered to those returning from a year abroad and those with certain medical conditions and/or disabilities. Any rooms that remain unallocated to these groups are offered to returning undergraduate students, normally by ballot. Over many years the demand from returners has been between 3 and 4 times the supply although in recent years this has diminished owing to the significant increase in the availability of rented accommodation in the private sector. The Accommodation Office has only offered a campus place to certain groups (such as second year students going in to their final year) to deliberately dampen demand in years where a residue of study bedrooms has been identified.

While returning students were not offered campus accommodation in September 2008, the attraction of Park Wood (£3,237 for a 39 week licence to include utilities) over Canterbury private sector accommodation (£3,500 average rental over 48 weeks plus utilities) is obvious.

Until 2002 the University offered all overseas fee paying students accommodation for their duration of study but this was removed when significant bedroom oversubscription was experienced in that year. A list of competitor universities offering overseas students accommodation for the duration of their study is shown at Appendix A. The University has long recognised that overseas students have greater difficulty in sourcing off-campus accommodation, reflecting their non-domicile basis, and lack of local support network and experience in the UK housing market.

For strategic and financial reasons, the University wishes to increase the number of postgraduate and overseas student numbers. If this is achieved, current accommodation will not meet current levels of guarantee. Current targets for postgraduate and overseas student numbers rise by roughly 500 between 2008/09 and 2010/11.

3. Competitive position and benchmarking

A snapshot of the ratio of bedrooms to full time registered students at competitor institutions is shown at Appendix B. It can be seen that Kent’s ratio, which rose to 40% on completion of WoolfCollege in September 2008, is high for the sector. The number of bedrooms on Canterburycampus also puts Kent in the top third of English Universities. Nevertheless, some direct competitors have ambitious schemes that will be realised in the next 3 years, with expenditure on new build accommodation in excess of £100M at Reading, and a higher amount at Surrey (828 new ensuite bedrooms by 2010). If one compares campus based institutions in similar smaller urban areas such as Essex (45%), Durham (43% over 2 campuses) and Lancaster (51%)[3], then the University’s position drops. Building 1,000 will take the percentage of full time students accommodated to 43.8% by 2012.

With the International Strategy in place, and the targeted growth noted above, the University has identified that 1,000 bedrooms will be required to reinstate the “duration of study” offer to overseas undergraduates, and to house all postgraduates for all years of study.

Should we wish to match the offers of Lancaster (two years on campus for all students) a further 1,500 bedrooms will be needed. Given the general funding uncertaintythis paper does not propose such a move but Finance Committee and Council may wish to discuss this option further once the University’s Estates and Strategic plans are finalised.

4. Risks

The risks attendant on all options relate to identifying sites that will achieve City Council planning consent; project costs; a downturn in student requirement for on-campus accommodation; affordability to the University; affordability to students, and the impact of ageing bedstock on student and external visitor recruitment. In addition, there are risks attached to the methods of financing used: margins on lending have increased and covenants may be tighter. PFI schemes may not be so attractive if the associated implied financing costs have increased or funding is constrained. Bankers behind the project companies may have tightened their contractual requirements and these will need to be built into any arrangement with a PFI provider.

Clear mitigation strategies will be needed against any drop in occupancy: the nature of build and location of units (to enable external income or capital to be realised further down the line) and a careful review of pricing policies to ensure that any downturn in student expenditure is managed cost effectively.

5. Financial issues

Until the recently negotiated agreements for WoolfCollege and Liberty Quays at Medway, all residential buildings had been funded directly by the University. The recent discussions provided new partnership funding options, whether as a transfer of risk or a nomination agreement. The commitment of senior management time has been common to all building projects although externally funded agreements take longer, as has been experienced across the HE sector where there has been third party involvement. Decisions on funding options, and the appropriate mix of University managed and third party operated accommodation will impact on each of the above options, as will loss of future income streams. It is assumed that a PFI deal will take a year longer to realise than straight borrowing and self build.

Bank lending is more constrained than in the past and this is reflected particularly in margins being quoted. Nevertheless, long term interest rates remain low and the total cost of borrowing will be similar to previous, recent deals at around 5.5%-6%. Lower margins could be achieved by accepting a 3 year initial loan arrangement, with the need to re-finance (c 1% saving, leading to an average £300k per annum lower interest cost, over 25 years). It would be possible to enter into a swap contract to guarantee the underlying borrowing rate for this period, leaving the margin to be re-negotiated as part of any re-financing. This approach runs the risk that funds will not be available for re-financing in 3 years’ time.

At present, banks are only holding open quotes for lending for between 4-6 weeks as their capital is restricted. It will be necessary to move quickly once a funding route is identified, to agree formal legal terms, if this route is taken.

The impact of a further £50m loan on the University’s ASC calculation will be in the order of 2.8%, taking it to 7%. This is in line with the HEFCE approval granted in 2004. Once the related income is included this falls to c6.7% and then reduces with inflation and other income growth.

A major consideration in choosing between PFI and direct provision is the level of control that the University has on its rental levels and services offered and response to student issues. Some of these issues are now being seen with the new WoolfCollege. There may be different approaches taken for on or off-campus buildings. While the risk of under-occupancy is reduced, the risks of substitution, and covenants on our own rental levels will reduce our flexibility to respond to any downturn in the market. Longer term, the opportunity for an increased level of unencumbered income also reduces.

These considerations need careful thought and discussion.

6. Summary of NPV calculations

The NPV investment appraisals that were conducted for Tyler Court, Park Wood Flats, WoolfCollege and Liberty Quays all indicated that non-discounted cash payback on a student residential scheme would occur in Year 12, and a positive NPV would be achieved in Year 18. An example for the new build is attached at Appendix C using realistic figures and a full refurbishment programme. In income and expenditure terms, borrowing will result in a positive net cash flow in the first year of £3.6m, offset by interest and depreciation charges of a similar amount to make a small improvement to reported surplusin the first full year of operation, increasing as the capital element gets repaid and rents move with inflation. [No conference income is assumed in these calculations although in practice this will be a major target for raising income.]

7. Impact of further new build

The immediate impact of new build residential accommodation, not just at Kent but sector-wide, is to reduce local and national pressures for more and better student accommodation. The challenge for Kent is to bring its current quality of provision into line with modern customer expectations and to provide the type of accommodation that best meets demand preferences. This might be a mix of cluster flats, town houses, high specification conference–style bedrooms with double beds, and add-on catering packages. This will involve new build where some current provision is deemed uneconomic to refurbish. Additionally there is a desirability to retain the ratio of students housed on campus above 40%. It is generally recognised that the lifespan of Darwin is a further 5-10 years at most and that the demolition of its residential wings implies a substitution of 300 bedrooms on campus. It will not be possible to take significant numbers of current bedrooms out of commission for a long term refurbishment and still materially meet current guarantees. Building further bedrooms therefore provides some flexibility for future strategic changes in current bedstock.

Any decisions on the re-furbishment of current provision will need to be taken in the context of the developing Estates strategy. This paper has been produced at this time because of the current pressure to meet existing guarantees and the need to increase recruitment of overseas and PG students for financial reasons.

Once the direction for any residential development is known, the impact upon catering and other facilities will need to be examined, both in terms of the potential drop in demand within College facilities but also any need for further catering/social spaces in Park Wood and Central Campus.

Finance and Resources Committee recommends to Council

1. That the proposal to build 1,000 additional study bedrooms on the Canterburycampus as soon as possible, at an estimated cost of £50m, be approved;

1. That the DVC (F & CS) be asked to investigate further how the project should be financed, this to include University borrowing (and the terms of this) and a PFI-style arrangement;

1. That it should authorise the Chair and the VC to act on behalf of Council to approve the financial arrangements for the project, subject to a report back to the next meeting of the Council;

1. That it should authorise appropriate University officers* to act on behalf of the Council in relation to making financial arrangements for the project, following 3 above, and to sign documentation to expedite this subject to a report back to next meeting of the Council.

*Deputy Vice-Chancellor, (Finance and Commercial Services), Vice Chancellor, Senior Deputy Vice Chancellor, or one of the Pro-Vice Chancellors.

DK Everitt / SMWesterman12/03/09

Appendix A
HEIs' accommodation offers for overseas
fee paying students
Institution / 1 Year / 2 Years / Duration of
study
University of Bath / X
University of Durham / X
University of East Anglia / X
University of Essex / X
University of Exeter / X
University of Kent / X
University of Lancaster / X
University of Leicester / X
LoughboroughUniversity / X
University of Reading / X
University of Surrey / X
University of Sussex / X
University of York / X
Appendix B
Ratio of full time students to bedspaces, competitor institutions
Institution / F/T students / Bedspaces / Ratio
2007/2008
University of Bath / 8,945 / 3,031 / 33.88%
University of Durham / 13,738 / 5,956 / 43.35%
University of East Anglia / 11,028 / 3,633 / 32.94%
University of Essex / 7,122 / 3,315 / 46.55%
University of Exeter / 11,826 / 3,967 / 33.54%
University of Kent / 10,454 / 3,940 / 37.69%
University of Lancaster / 9,777 / 6,857 / 70.13%
University of Leicester / 10,045 / 4,142 / 41.23%
LoughboroughUniversity / 13,196 / 4,814 / 36.48%
University of Reading / 10,494 / 4,076 / 38.84%
University of Surrey / 9,495 / 4,090 / 43.08%
University of Sussex / 8,736 / 3,185 / 36.46%
University of York / 10,409 / 3,771 / 36.23%

Information from University websites

1

[1] Undergraduates need to apply before 31 July in year of entry and meet the university’s academic entrance requirements.

[2] Postgraduates need to apply before 31 July in year of entry, meet the university’s academic entrance requirements and pay a £300 room reservation deposit.

[3] 2007/08 figures bedspaces as percentage of FT student numbers.