What has a Bloomsbury side street got to do with former prime minister Neville Chamberlain, war poet Rupert Brooke and Alex Westaway, the lead vocalist and guitarist in post-hardcore band Fightstar, as well as many hundreds of other influential men and women?
The answer is that the profits from much of the property in Lamb’s Conduit Street, WC1 – the slightly down-at-heel, Bohemian road on which Victorian pub The Lamb and celebrity chef Arthur Potts-Dawson’s People’s Supermarket can be found – has helped fund their education.
The freehold to the offices, shops, restaurants and homes at the northern end of the quiet thoroughfare, which links Theobold’s Road to the south with Guildford Street to the north, is owned by the prestigious Rugby School in Warwickshire. Rent from 176 tenancies on the street and its surrounding area has provided a tidy investment income for the school for the best part of 500 years.
The school’s financial statement for the year ended 31 July 2011 shows a balance of £39.8m for its London estate. After accounting for the costs of its maintenance and administration, one-fifth of the income generated is paid to Rugby’s neighbouring state school, the Lawrence Sheriff School. After that, the remainder goes to fund the school’s long-term capital projects as well as foundations and scholarships.
Rugby is far from alone in using property investments to support its operations. Although few are keen to broadcast the fact, Britain’s 2,500 independent schools between them own vast tracts of land and property.
Last week, a report by Farebrother, which has managed Rugby’s London holdings for the past 23 years, estimated that the UK independent school sector owns non-operational property assets of £51.9bn. Over the next five years, this is expected to grow significantly.
The agent conducted a survey of Britain’s public school bursars, asking them a set of detailed questions about their property strategies. Of those that responded, 37% said they already invest directly in non-operational property.
These include Christ’s Hospital Foundation, popularly known as the Bluecoat School, in Sussex, which traditionally waives or subsidises the fees of the vast majority of its students by relying on funds from its endowment estate. Christ’s probably has the highest value property portfolio of any UK public school. Its investment properties are valued at £108.2m, and include the 24,000 sq ft Amadeus House office and retail block on Long Acre, WC2, and it owns land worth another £6.4m.
The school is also one of the most active asset managers. Last July it sold its 14,935 sq ft 22-22a Queen Anne’s Gate holding in SW1 to an offshore company for £17.5m, having changed the use from offices to residential. Earlier in the year, it also sold a property in Islington, N1, and bought a shop in Guildford, Surrey.
According to the school’s financial report for the year ended 31 August 2011, the annualised total return for the portfolio was 15.1%, well ahead of the IPD All Property Index return of 8.8%.
Prime minister David Cameron’s former school, Eton, is another significant property owner. According to the school’s report and accounts to 31 August 2011, the school owns property investments worth a total of £42m.
Winchester College in Hampshire has benefited from extensive landholdings. According to its financial accounts for the year ended 31 August 2011, these include around 9,000 acres of agricultural land valued at £45m, as well as six houses let at market rents together valued at another £4.1m.
“The college needs to have sufficient funds to enable it to meet its charitable obligations should there be an unexpected revenue shortfall,” says David Clementi, warden of Winchester College in his most recent accounts.
“The college invests those funds it has been given to support its activities for the long term across a spread of different asset classes.”
Other public schools understood to have significant property assets include Harrow, Westminster and Stowe.
Besides those schools investing directly in real estate, others invest in pooled property vehicles through charity property investment vehicles, such as CCLA Investment Management’s COIF Charities Property Fund and The Charities Property Fund managed by Savills.
Last year, the COIF fund bought the freeholds of six office buildings at Solent Business Park in Hampshire from Goodman for £9.8m, reflecting an 8.44% yield.
“Most schools’ investment property holdings are held through foundation trusts, which are separate legal entities and which have benefited from endowments decades or centuries ago,” says Tim Williams, bursar at Wellington School in Somerset, which owns around 45 acres of land as well as a small investment portfolio.
“Bearing in mind how much cash makes when you keep it on deposit at the bank these days, land and buildings are seen as being at the safer end of the spectrum, and you don’t take risks with investments you have been charged to look after. Our small portfolio is split between cash, equities and land. But if you invest in land or property it always has to be as a long-term investment.”
With the global economic downturn reducing the value of many endowments, many schools are looking to find ways of bridging the funding gap.
According to Farebrother, appetite among schools for commercial property is growing. A staggering 80% of those contacted by the agent said they wanted to increase or maintain their exposure to real estate.
Christ’s Hospital, for example, said in its most recent accounts that its total endowment has been “seriously affected by the economic downturn over the past four years”, falling from £300.7m in 2007 to £256.5m in 2011. However, over the same period, the value of its direct property investments remained fairly constant, falling from £118.5m in 2007 to £108.2m in 2011.
According to Farebrother, actuaries are now recommending that funds increase the proportion of their cash invested in real estate from the traditional 6% to around 10% to better reflect the relative returns from property assets compared with other investment classes.
“These schools are highly competitive with each other,” says Andrew Glover, head of property management at Farebrother. “If they want to continue to attract students, they know they need to invest in the best facilities and the best teaching.”
A quarter of schools which already invest in real estate said they wanted to invest more in off-site investment with any available cash or liquidated share capital, citing the main driver for the change being the lack of performance in other investment classes, particularly equities. The small number of schools which already invest in real estate but said they intended to decrease their holdings were generally releasing capital to maintain or develop their own school buildings.
“The returns from real estate investment have, for many years, been viewed as a constant when compared with asset classes. What draws these schools to property as an investment is the fact that you can make both an income return and a capital return,” says Glover. “Many of these schools have suffered from stock market declines over the past few years due to circumstances way beyond their control. Property can act as a hedge against inflation, and average property yields are outperforming returns on other investments.”
Independent schools: A timetable of funding
Rugby School: The school’s London estate was established by Lawrence Sherriff, or Sherriffe, a Rugby-born London grocer, in 1567, in his will. His founding bequest included eight acres of pasture in Conduit Close, at that time half-a-mile outside the London city walls, and therefore exempt from development. Residential development on the estate began in the 18th century, and by 1814 the estate listed some 149 houses. After a period of declining values in the 19th century, values rose again in the 20th, when the estate benefited from the sale of land to Great Ormond Street Hospital. The school’s 2011 accounts record a balance for the estate of £38.4m with incoming funds of £3.5m.
Christ’s Hospital: Christ’s Hospital was founded in 1552 by King Edward VI, assisted by Nicholas Ridley, Bishop of London, and Sir Richard Dobbs, lord mayor of the City of London. The school was set up via a committee of 30 merchants. Edward granted the Palace of Bridewell, his lands at the Savoy, and rents and other chattels to create three Royal Hospitals – Bridewell Hospital (now the King Edward’s School, Witley, Surrey), St Thomas’ Hospital, SE1, and Christ’s Hospital. Christ’s Hospital is almost unique for a British independent school in that it educates a proportion of its students free, and most at a reduced rate. For funds, the school relies heavily on an endowment valued in August 2011 at £256.5m, of which £108.2m is investment properties and another £6.4m is land. Over 2011, investment properties recorded a total return of 15.1%. The school owns extensive London commercial and residential property holdings in the West End and is supported by a number of London livery companies. According to its 2011 accounts, the school’s property holdings are split between £6m of agricultural and non-operational land, £74m of commercial rental properties, £29m of industrial rental properties and £4m of residential rental properties.
Winchester College: Britain’s oldest public school was founded in 1382 by William of Wykeham, bishop of Winchester and chancellor to both Edward III and Richard II, and the first 70 poor scholars entered the school in 1394. It was founded in conjunction with New College, Oxford, for which it was designed to act as a feeder. The buildings of both colleges were designed by master mason William Wynford.
According to the school’s 2011 accounts, the college’s property investments are worth £49.2m and comprise agricultural holdings in Hampshire, Cambridgeshire and Dorset worth £45m and a £4m portfolio of houses let on the open market. As well as residential income from the farms, income is also received from ancillary activities such as mobile phone masts, sporting activities and forestry.
