University leaders have sound commercial reasons for not selling and leasing back campus buildings to raise funds for capital investment, and the idea this is a magic bullet ignores reality, writes Fred Hilmer.
OPINION: When an idea surfaces that seems the obvious solution to an ongoing problem, the temptation is to ask: Why hasn’t someone thought of that before?
The proposal put by Philip Clark, chairman of the Education Investment Advisory Board, reported in these pages last week, is a case in point. Clark is calling on universities to sell and lease back their campus buildings to raise funds for capital investment.
At first glance it might seem this is the answer to universities’ intractable funding problems. Clark estimates universities face a capital requirement of between $7 billion and $10 billion over the next decade. Here we are, sitting on billions of dollars’ worth of campus property when cashed up superannuation funds are anxious to invest in property and we could leverage the value of those assets into new capital investment.
Why not free up the capital via sale and leaseback and invest in much needed new infrastructure? It sounds simple, almost too good to be true, because it is. Sale and leaseback of our core campus assets is not the answer to our funding problems and my concern is that governments might find such a “quick fix” suggestion attractive, rather than grapple with finding a sustainable funding base for our universities.
The editorial accompanying the report assumed that universities sitting on these “real estate goldmines” are so attached to owning prestigious showcase buildings that they pass up the opportunity to grasp the commercially obvious solution.
However, university leaders have sound commercial reasons for not going down this path. The idea this is a magic bullet ignores reality. Sale and leaseback is nothing more than borrowing under another name. The lease cost would be a new charge that has to be met from operating budgets.
Two questions then arise: first, when and for what purpose should universities borrow and, second, is sale and leaseback the most cost-effective method?
Situations for borrowing
There are situations when universities should borrow. In the case of UNSW, we are borrowing to accelerate a capital program. But this is short term, five-to-10 year borrowing to be repaid from operating, capital and philanthropic funds in this time horizon. Universities can also borrow responsibly for income earning projects. For example, borrowing for student housing, where the rental income services the loan, makes good sense.
On the other hand, borrowing for core activities, for specialised teaching and research facilities, is a dangerous strategy. Australian universities are already inadequately funded for teaching and research, and adding a financing cost to operating budgets would put further pressure our ability to provide the quality our students and the community demand.
Second, if borrowing is justified, is sale and leaseback the best way to raise funds?
At this time, the answer is a clear “no”. UNSW is currently in the capital markets, and we are being offered rates far more attractive than the implied interest cost of sale and leaseback deals. Sale and leaseback did make sense in our early financing of student accommodation as the rental income serviced the “loan”. Today, this arrangement isn’t economic because universities can borrow more cheaply than the entity offering sale and leaseback.
In short, non-profit organisations, such as universities, should not be borrowing except in special cases and I certainly don’t believe universities should be forced to borrow to finance research and teaching.
There is a pressing need for a sustainable funding base: either through greater government investment, a revitalised EIF fund, fee flexibility, or a mixture.
What we don’t need are throwaway suggestions that there is a quick fix to adequately funding our higher education sector.
Professor Fred Hilmer is Vice-Chancellor of UNSW.
This opinion piece was first published in the Australian Financial Review.