Up to $300m in bank loans to help University of Auckland fund biggest construction programme in its history

By Gareth Vaughan

The University of Auckland has become a borrower, for the first time in its 130-year history, and will borrow up to $300 million from banks over the next few years as it embarks on its biggest ever construction programme.

University of Auckland Vice-Chancellor Stuart McCutcheon told interest.co.nz in a Double Shot interview the borrowing programme was underway and would "ramp up", peaking in about four years with two major development projects costing more than half a billion dollars, combined. Approval had to, and had been, received from the Government for the borrowing.

The University was striving to remain attractive to good students and good staff, and develop more integrated campuses, McCutcheon said.

"We have approval to borrow up to $300 million because we have two very large projects totaling over $500 million coming up," McCutcheon said. "So we have a need to borrow in the short-term to fund those projects between now and a decade hence."

"We will borrow from the banks. We're a good bet. We've got a significant base of unencumbered assets and we'll simply borrow at commercial rates through the banks and then we'll pay that loan off through the cashflows," McCutcheon said. "The borrowing gets us through the next three to five years when we have the largest capital construction programme that we've had in the University's history."

"We have just started to borrow. That will ramp up. The peak is in about four years when these two projects are consuming resource at a major rate."

He declined to name which banks the University was borrowing money from. The University's annual report lists its bankers as BNZ, ANZ, and ASB's parent Commonwealth Bank of Australia (CBA).

Big spending on engineering & science facilities

The two big projects are what McCutcheon describes as a major refurbishment and new build for the engineering department costing around $250 million, and a big rebuild of science facilities costing more than $200 million.

The University also hit the headlines earlier this year after buying the 5.2 hectare ex-Lion Breweries site in Newmarket for an undisclosed sum. However, McCutcheon said plans to sell the University's Tamaki Campus should offset the cost of the Newmarket acquisition.

He said two reasons were behind the Newmarket purchase. One is to help meet the University's growth, and the other is a desire to bring the whole university together.

"The University's expanding at a rate of about 6,000 square metres of space per year because although we're holding student numbers, or undergraduate numbers, we are growing the post graduate programme and we're growing research," McCutcheon said. "So that means we need more lab space, we need more office space, we need more post graduate teaching space."

"The other issue is that many of the challenges that New Zealand universities face in terms of contributing to the country's development require multi disciplinary approaches."

"If you think about climate change, if you think about food security and safety, if you think about diabetes in some of our populations, they typically require researchers from multi disciplines which means you want the University close together," McCutcheon added.

"Our problem is that the Tamaki and Epsom campuses are some distance from the city and Grafton campuses. So the Newmarket acquisition offers us an opportunity to bring the whole university together, into essentially one rather large campus. But still a single unit, as opposed to operating the University over multiple locations that are spread out all over Auckland."

Almost $1 billion of annual revenue

The University's annual report shows 2012 calendar year operating revenue of $931.408 million, down $1.58 million year-on-year. Total comprehensive income was $32.895 million, down $762,000. Total equity stood at $1.4 billion.

The annual report also shows total loans and borrowings of $46.222 million with $42 million of this interest bearing bank loans. The University has about 40,000 students of which about 5,000 are foreign students.

The University's governing body, its 18 member Council, includes ex-CBA, ASB and Air New Zealand CEO Ralph Norris, former-Fonterra CEO Andrew Ferrier, and Fisher & Paykel Healthcare managing director Mike Daniell. All three were appointed by the Minister of Education. First NZ Capital managing director Scott St John is also on the Council. You can view the University's strategic plan here.

In the past McCutcheon said the University had funded capital development out of its own cashflow.

"We feel a need to get some serious development done in the sciences particularly, which is a very expensive area for the development of buildings (as) laboratories are hugely expensive. So being willing to borrow is just a way of accelerating that process."

"We expect in turn, of course, that the better quality of buildings will attract better students, will attract high quality staff (and) they in turn will write more research grants. So there's a virtuous circle if you get it right of improving the quality of the campus, bringing in new revenue streams and new opportunities, and then that creates further demand for campus renewal and helps you refund it," said McCutcheon.

The University was also spending several million dollars per year upgrading lecture theatres, had refurbished some arts buildings, and established a new engineering library.

"If you look at this university and New Zealand universities historically, the funding pressures they've been under have meant there has been rather a lot of deferred repairs and maintenance. We're at a point now where if we don't have quality facilities we simply won't retain the best students and we won't retain the best staff," said McCutcheon.

"The leading Australian universities are recruiting in New Zealand. They're in Auckland this week recruiting for students, they're constantly looking to recruit our best staff. So we have to have a quality research and teaching environment if we want to keep top quality people here. That means we have to be prepared to invest in that environment."

Newmarket to be 'up and running quite quickly'

In terms of the Newmarket site, demolition's underway with construction of a new civil engineering research laboratory set to kick off within a couple of months. McCutcheon said refurbishment of some existing buildings will also take place, creating an integrated engineering research facility.

"Both of those projects will be finished by the end of 2014. That will allow us to bring engineering research from Tamaki into Newmarket and some from the city. Moving stuff out of the city buildings will then allow us to refurbish those buildings."

Although the Newmarket Campus would be "up and running quite quickly", the only immediate development plans were for the two facilities described above with longer-term expansion planned there over the next 30 or so years.

"Tamaki is being prepared for sale now. Our property services team are receiving expressions of interest, they're also doing the necessary information memoranda and the due diligence and stuff that's required to sell the Tamaki Campus," McCutcheon added.

"I'd expect that process will get underway more or less immediately."

He said ultimately the Tamaki Campus was likely to be sold in pieces over time.

As for the Epsom site, the University couldn't leave it until a new education facility is built in the city. And that won't happen until the other big projects are done, meaning it's scheduled to happen sometime between 2018 and 2020.

"Once we build that new education facility then we'd be in a position to sell Epsom. So we're talking about, I think, a decade away."

The Epsom Campus is the University's main campus for its Faculty of Education and is attended by about 5,000 students. Opened in 1991, the Tamaki Campus occupies 32 hectares in Glen Innes. The Grafton Campus, featuring the University's Faculty of Medical and Health Sciences, is opposite Auckland Hospital and adjacent to the Auckland Domain.

Newmarket site 'zoned for relatively high density'

In terms of future growth, a key factor about the Newmarket site is it's zoned for "relatively high density," said McCutcheon, meaning there was scope in the future for a lot of teaching and research there.

Combined with development potential at its city and Grafton campuses, the Newmarket Campus would provide 30 to 40 years of expansion at the University's current growth rate.

"We don't know whether that (growth rate) will continue. It's a high rate of expansion at the moment (and) it may slow as we get major projects completed."

"But certainly it (Newmarket) secures the University in the central city for the next 30 or 40 years. Beyond that who knows? Technology may change the way in which the University operates. There may come a point in time where we have to look for other development sites close to the University's central campuses," said McCutcheon.

"But I think the advantage of being in an integrated campus is what really matters and Newmarket really gives us that opportunity whereas Epsom and Tamaki are some distance away, (and) quite hard to get staff and students to. Particularly when you've got an hourly timetable. So from that point of view Newmarket offers us a huge advantage."

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