The Subplot | Are UK universities at risk of bankruptcy?

Welcome to The Subplot, your regular slice of commentary on the business and property market from across the North of England and North Wales.

THIS WEEK

• University challenge: why the risk of bankruptcy at UK universities is bad news for the property business and for local economies
• Elevator pitch: your weekly rundown of what is going up, and what is heading the other way

Listen to the podcast edition

UNIVERSITY CHALLENGE

There’s no money left

Fears are growing that major UK universities will go bust – meaning proper bust, doors locked, staff sacked. The North’s economy and property industry are heavily exposed if things take a nasty turn. How great is the risk, and who is most in danger?

A higher education funding crisis has been brewing for years. The cause is a version of the government-created problem that also afflicts local councils (Subplot, 4 January 2024). In short, government has cut funding (down 78% in the decade to 2021) whilst preventing universities from raising more money from UK-based student fees (tuition fees were capped at £9,250 in 2017). In these rock-meets-hard-place circumstances, trouble was only a matter of time.

Going under

Universities had been trying to plug the gap with overseas students, because there’s no cap on their fees, and it worked for a while. But Covid, among other things, meant a collapse in overseas student recruitment, which is still falling. Immigration rule changes won’t help, either. The result is spiralling deficits: about a third of universities are running up losses each year. Insider talk is that imminent breach of debt covenants will be the trip hazard that lands universities in bankruptcy. Ministers have been warned to prepare for the worst.

Weak spot

The property industry is up to its eyes in university-related projects from student housing to science parks, labs, and massive mixed-use schemes like the £1.7bn ID Manchester. Partnerships with universities are now ubiquitous in the property industry. Local council planning committees – like Manchester’s last week – are dominated by university-related development applications. If it all goes wrong, the property industry has a problem.

Surprise, surprise

How many private sector partners have seriously grasped that universities could go bust? And bust they certainly can go. Since 2019, ‘educational insolvency’ involves the full panoply of company voluntary arrangements, administration, creditors’ voluntary liquidation, compulsory liquidation or fixed charge receivership. In the minds of policymakers that’s a good thing – bad businesses should be allowed to fail, and it keeps the better ones focused. There’s enormous doubt whether ministers would actually allow a bankruptcy – but they’d likely insist on big changes or mergers, which might be almost as disruptive.

Science parks, labs, etc.

There are three areas to watch: joint ventures to develop sites; the effect on local economic growth; and the student housing sector. First, joint ventures. Under pressure to make money universities have been enthusiastic partners in all kinds of property ventures – ID Manchester is the largest in our region, but the list is long.

Will universities be forced to be more risk-averse, or pull out of their more ambitious JVs? Subplot has been speaking to university insiders who think they could. “Often the buildings and the big off-campus projects are part of the problem,” one says. “Most of the estate needed replacing after a generation, and universities needed to add more to the community and local businesses. But they’ve often dug themselves into a terrible hole by doing so.” Interest rate rises haven’t helped.

Don’t give up hope

The view from the private sector is not quite so gloomy. Adam White is executive director and Northern public sector lead, at CBRE. He says universities are unlikely to be deterred from participating in the development of science and innovation campuses. After all, there’s a well-documented shortage of lab space they want to put right.

We can work this out

White explains: “Where a project’s vision is strong and the commercial case is compelling, partnerships between universities and private sector investors and developers can still thrive.”

JV structures can be tailored to meet a university’s needs via various delivery models ranging from ‘capital light’ arrangements to corporate joint ventures where the university invests significant equity and takes direct development risk-specific project objectives. CBRE expects to see more, not less, partnership opportunities coming to market in 2024/2025 as universities seek to leverage their property assets and research expertise.

This might hurt

The second risk is to local economic growth. The University of Central Lancashire (UCLan) is a pioneer of the celebrated ‘Preston Model’ which has seen local institutions try to spend locally and mindfully to improve the city’s economic prospects. But could the model work in reverse, meaning university financial woes have unhappy spin-offs for host cities? Yes it could, says Prof Philip Whyman, director of the Lancashire Centre for Business and Enterprise and one of those studying the Preston Model’s effects.

If universities are under pressure then “potentially you’re weakening the multiplier effect – and if that happens, it starts to bite…,” Whyman says. “As it happens over the last few years we’ve seen overall anchor spending lower than it was, yet the effect on the local economy has been maintained. So you can make more with less, but you could make more with more.” So, reasons to hope?

Student beds bonanza

The third area of interest is student housing. Running in-house student accommodation is costly and time-consuming for universities. A few have outsourced, and maybe more will now do so, given their own financial peril. They should, according to Richard Ward, head of research at student beds platform StuRents. “Universities should be considering working more closely with PBSA developers to ensure they can continue to attract students,” Ward tells Subplot.

A mixed picture

The financial headaches now afflicting universities will get worse before they get better. The government will have to decide how far it is prepared to let things go, whether to allow bankruptcy and closures, and if so how many. For the property business – and local economies – it means yet another uncertainty and more risks to growth and prosperity.

But it won’t be an extinction event: joint ventures that made sense will still make sense, and new opportunities to outsource in areas like student housing might arise. It all depends on what politicians want.

ELEVATOR PITCH

Going up or going down? This week’s movers

It’s an excellent week to splurge hundreds of millions on big regional shopping centres, and an awful week to be waiting for politicians to make up their minds about massive warehouse schemes. Doors closing.

Clear thinking on planning

Langtree, and its partner Panattoni, have been waiting two years for the decision on a 3.1m sq ft logistics and industrial proposal for an M6 site south of Warrington. This week they learned the wait is likely to go on.

This isn’t the first time that economically significant warehousing schemes have been stymied by delays: between 2019 and 2022 five North West logistics schemes, totalling 6.8m sq ft, hung in the balance. Developers said it put an eye-watering £1.4bn worth of economic benefits on hold (Subplot, 21 January 2021)

The Langtree-Panattoni site has a tortured history: the government decided not to call in the application in March 2022, then in November 2022 changed its mind and said it would, whilst Warrington council first agreed the land could be removed from Green Belt, then changed its mind, and now says it’s neither in favour nor against.

The Planning Inspectorate has been left holding the baby and says it will wait another six months while challenges to the council’s strategic plan are worked through.

All too often “the planning system” is said, by politicians, to be the cause of delays and the economic sclerosis that results. Maybe sometimes it is, but in this instance it’s politicians’ wibbly-wobbly approach to decision-making that is screwing up the prospect of jobs and investment.

Buying big Northern shopping centres

This week brought word that Mike Ashley is circling over Sheffield’s Meadowhall, and Land Securities appears to be firming up its intentions to buy a majority stake in Liverpool One. Big Northern shopping centres are now firmly in the “buy” category.

Mike Ashley’s Frasers Group is said to be finalising a £750m bid for Meadowhall in a deal with British Land and Norges Bank Investment Management. The yield would be around 7%, as Place Yorkshire reported.

Over in Liverpool, summer speculation that the Abu Dhabi Investment Authority planned to offload its 69% stake to Landsec has hardened into something like certainty. Landsec appears to be edging closer to a deal for a £350m sale at a yield of around 8%.

Of course, there’s been a massive destruction of value in shopping centres. In 2012, when Norges bought into Meadowhall, the mighty Sheffield mall was valued at £1.5bn. So it’s down by half since the peak. Painful for vendors, but water off a duck’s back for buyers. What they notice is that the shopping centre market has hit the bottom, and the payback for them looks tempting.

Prime regional shopping centre yields are very nearly double what they are in the hottest rival sector, industrial, where buyers’ money could only make 4% to 5%. Better still, there are early signs that shopping centres making actual positive returns on investment, which gives lenders confidence and thus the purchasing merry-go-round begins to spin.

It’s not all rosy, shopping centre rents are still falling, overall, even if the big centres are doing better. But with nobody building any more shopping centres in the indefinite future, buying into the sector feels like a solid one-way bet.