On the north-west edge of Cambridge, a new town has sprung up. Cranes loom above hundreds of flats, a community centre, a Sainsbury’s supermarket, and a mural decorated in the style of a primary school project. The burgeoning community has no church, but there is a cricket pitch.
Eddington is itself a work of faith for the city’s ancient university, which has taken on one of the most ambitious construction projects in the country, and assumed nearly £1bn of debt through complex financial arrangements. Designed to provide university staff with affordable accommodation, it is a physical statement of intent at a time of intense international competition in higher education.
“I did try to look around the world of any university, anywhere in the world, that’s doing anything comparable,” said David Cardwell, pro-vice-chancellor for strategy and planning at Cambridge University. “I couldn’t find anything.”
The project, referred to in university circles as North West Cambridge, also reflects a new age of financial innovation for the UK higher education sector, which has borrowed heavily in recent years as direct funding from the government has fallen. Yet early problems, including substantial cost overruns, raise the question of whether the often archaic governance structures of academic institutions can cope with the commercial world in which they must now operate.
Meanwhile, the economics of the project have attracted little scrutiny even as investors have snapped up bonds which do not mature for another half century. The university has promised its staff affordable accommodation, but is building that housing on the premise that rents will bring in enough money to repay its debts. A venerable institution risks re-learning the lessons of the company towns of the industrial age - that a mismatch between wages and living costs can only stretch so far before something breaks.
Teething issues
In 2012, at a discussion at the university’s 18th century Senate House, David J. Goode urged other members of the institution to share his enthusiasm for “the most exciting development project this University has ever considered”. The University Council, an administrative body composed of academics, other staff and external members, had recently sought approval to commence development.
A member of the Faculty of Divinity, Mr Goode cited the Roman poet Horace in conclusion: “Dum loquimur, fugerit invida ætas: carpe diem, quam minimum credula postero.” (While we speak, envious time will have fled; seize today, trust as little as possible in tomorrow.)
The tone of the meeting reflected broader optimism around the North West project. Cambridge had also just issued its first ever bond, borrowing £350m for 40 years, at a coupon of 3.75 per cent, to help pay for the plan. The university benefited from a triple A rating, a measure of credit risk on bonds provided by specialist rating agencies, placing its borrowing costs close to that of the government.
In 2013, the local authority formally approved a plan for 1,500 properties to be built for private sale, 1,500 to be let to staff at affordable rents, accommodation for 2,000 graduate students, plus research facilities, a hotel, a supermarket and a community centre. So far, 643 affordable homes for staff have been built, alongside much of the infrastructure and amenities; a second phase is expected to add to this.
In a strategy common among housing associations, the sale of land for private development would help to fund the development’s core mission of providing affordable accommodation for staff. The university redirected funds it had borrowed by lending to the project; a limit was placed at £250m, though this was increased in 2014.
The first real sign of trouble came in July 2015, when the university’s finance committee was notified of cost overruns, sparking internal controversy and a major review.
An independent assessment found forecast construction costs for phase 1 of the project had ballooned by more than £100m - from £259m in July 2013, to £378m in July 2015 – according to a PwC report commissioned by the university and seen by FT Alphaville. The university also became embroiled in a dispute with Skanska, the Swedish company, which provided roads and other infrastructure. Skanska and the university declined to comment on commercial matters.
The minutes of a discussion at the Senate House in November 2015 show that enthusiasm had given way to concerns about the project. Ross Anderson, a professor of security engineering, pointed to possible refinancing risk in the middle of this century. Mr Goode suggested the project was not “planned and set up properly” and questioned whether those overseeing it had sufficient experience of large building projects.
Gordon Chesterman, a director at the university’s careers service, argued the real threat was that plans for affordable housing might suffer delays or reductions. “It is too tempting for affordable housing to become commercial housing, generating short-term windfall income for the University,” he said.
Others in the meeting defended the project, arguing that it was not a “cost blow-out”, and that the cost increases were only a potential liability if no action were taken. Despite this, official reports adopted a critical tone.
In addition to the PwC review, the university’s audit committee produced two reports. The second of those highlighted some of the problems facing an academic institution engaging in real estate development on an unprecedented scale.
“The Audit Group recognises that the nature of the University as a self-governing community of scholars is a fundamental constitutional feature of its ability to conduct its primary academic mission… However, as the commercial activities of the University continue to grow in importance, it is becoming increasingly clear that the governance which is appropriate for the academic activities of the University is not necessarily appropriate for its commercial activities.”
Among the various recommendations of the reports, one stands out. “Large and complex projects require a senior leader – an individual who feels (and is) responsible for the success of the project” the PwC report said. “Phase 1 of the NWC development currently lacks this individual”.
A second bond
Until 2007, Anthony Odgers was a senior banker at Lehman Brothers, the infamous US investment bank which collapsed in the financial crisis of 2008. From there, he moved to Deutsche Bank, where he was global co-head of its restructuring advisory group. Afterwards, he joined the civil service as deputy chief executive of the division handling government investments, before becoming Chief Financial Officer at Cambridge University last year.
Before the Gonville and Caius College alumnus took the job, it didn’t exist.
“My role … is really strategic finance rather than operational finance,” he said. “I look after the quasi-commercial periphery,” he added. “Almost everything we do has an academic mission, but some feel more like organisations”, pointing to the university’s publishing business, the oldest of its kind in the world, with turnover of more than £300m in the year to the end of April.
On the North West project, Mr Odgers said: “As with many projects of this size and scope, there have been a number of challenges and complexities.” He added that the results of a review into what had occurred, and could be learnt, have been “considered and implemented in the intervening three years”.
Certainly, when Cambridge returned to bond markets this summer, borrowing £600m over 50 and 60 years and taking its total bond financing to almost £1bn, the debt was an easy sell. But while the bulk of the money was expected to be used for the anticipated second phase of the North West Cambridge Development, the university’s press release made no mention of the project, referring only to “revenue-generating projects”.
Dominic Kerr, an investment banker at HSBC, which worked on the sale of the bond, wrote an article for the Times Higher Education suggesting the Cambridge deal could lead to more bond financing from universities, but similarly did not mention the development.
Half of the new bond was linked to the consumer price index, meaning that if inflation increases, repayments also increase. Financing structures often aim to match the characteristics of assets with liabilities. In a report on the university, Moody’s, the rating agency, wrote that “the CPI-linked bond obligation matches expectations of CPI-linked rental income from the staff accommodation.”
It is common for rental housing, such as student accommodation and properties owned by housing associations, to link rents to inflation. According to Mr Odgers, the link in the North West Cambridge case is not “explicit” – the money is owed by the University - but “our rents are more likely to be tied to inflation than any given fixed number”.
Inflationary tensions
A company town was at the heart of one history’s most famous conflicts between workers and their employer. George Pullman, who made a fortune in railroad carriages, built his own town on the south side of Chicago in the late 19th century.
For more than a decade it was lauded as a shining example of industrial paternalism, but when the financial crisis of the 1890s struck, wages fell. Rents, set by the business, did not. Tensions culminated in strikes so violent 30 people died and the events are now memorialised in Labor Day, a US national holiday.
In the present day, real wages for junior academic staff have fallen throughout the period following the financial crisis of 2008.
“There has been a huge pressure, because salaries have been below inflation and rents increase above inflation,” says Mr Odgers. “We’re certainly going to reduce that disparity, we’ll have to see what happens to real wages … there’s been real wage decline across the economy,” he adds.
Looking ahead to the duration of the debt the university has taken on, however, he was more optimistic. “I cannot believe that over a 50-year period you’ll have sustained real wage decline”, he said.
Below-inflation pay rises have already sparked tensions – the latest bond’s prospectus flagged the risk of “a deterioration in employee relations”. This summer, the University and College Union, a national organisation, balloted members for industrial action on pay, which closes in October. It said higher education pay had declined in real terms by 21 per cent since 2009.
Sally Hunt, general secretary of the union, said in June that “staff working in our universities have had enough of seeing their wages held down while institutions prioritise capital spending and building reserves”.
The plan for Phase 2 of the North West Cambridge Development has not yet been fully approved by the university, though it is expected to add around 800 further affordable homes for staff, alongside more private sales. Hill, a private construction company, has bought a lot on the site, where it is currently marketing two-bed flats at prices from £489,950 to £699,950. Four-bedroom houses are on sale for £1,149,950.
Any town where the employer is also the landlord invites scrutiny of the relationship between rents and pay. The university submitted, as part of its 2011 planning application, a “key worker housing statement” which set out rental principles where the “majority” of rents would be charged at 30 per cent of the occupier’s net household income.
However the link to net income was abandoned this year, in favour of a new approach that charges fixed amounts based on gross average salaries across staff. This priced the rent on a two-bed flat at £928 a month, and a one-bed at £738 (including standing charges for electricity and hot water, but not other bills). Those with a household income of above £80,000 would be excluded.
According to letters seen by FT Alphaville, existing tenants had the option of sticking to the previous model. The change effectively raised rents for tenants on lower wages, but reduced it for those earning more. Postdoctoral researchers, the main group targeted for the accommodation, earn £32,000 to £40,000 according to current vacancies at the university. At the lower end of that scale the rent on a one bed flat would take 35 per cent of a post-doc’s net income, before any student loan repayments or pension contributions.
A spokesperson for the university said: “The University’s principle aim in delivering the North West Cambridge Development is to provide affordable accommodation for staff. Rents are deliberately set below market rates and the development has proved popular with our staff.”
Asked if Cambridge could have increased remuneration to postdoc staff, who are paid primarily via research grants, rather than building specialist accommodation designed to reduce their housing costs, Mr Odgers suggested such a move would not be “solving the problem”.
“Cambridge is massively short [of] houses,” he said. “If you pay people more without creating the houses, all you’re doing is pushing up the house prices. What we’re trying to do is address the fundamental issue, which is more houses in communities that work well for our people”.
This approach involves a careful balancing act. On the one hand, it aims to provide a subsidy to junior staff. On the other, the project relies on rental income from those same staff to pay off the debts. Rents may be fixed now, but there is potential for them to rise significantly. According to the Eddington website, the fixed rents on current properties can be increased by a maximum of 3.5 per cent a year, and in the fourth and fifth year by a higher amount (currently 5.5 per cent).
The project is only half-built, meaning it is difficult to compare overall rental income to debt servicing costs. The new age of long-term university borrowing – over £5bn of debt has been issued in the UK since 2012 - has come in an environment where interest rates and inflation have remained suppressed. The inflation-linked part of the bond is capped at 3 per cent, limiting the impact runaway inflation stands to have on Cambridge's borrowing.
In the financial world, confidence in abstract structures tends towards articles of faith - ones likely to be tested only years or decades after the fees are paid and investment decisions are taken. But, in that 2015 meeting which addressed the early cost overruns, some saw the situation in human terms. Rachael Padman, a Physics lecturer, turned to another example from the history of labour relations: “we have a problem that Henry Ford would have recognised: we need to pay our workers enough that they can buy our products.”
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