The Transformation of Spanish University Is Being Financed Outside of Spain

L’Auberge Espagnole is a Cedric Klapisch movie from 2002 that is a joy to re-watch every few years. Starring Romain Duris and Audrey Tautou most notably, the excellent film (eventually made into a trilogy) is about college kids from all over Europe who are attending school in Barcelona. They live together in a crowded apartment.

That they’re in an apartment speaks to a somewhat novel aspect of Spanish college education. As Raphael Minder of the New York Times explained it in a recent piece, studying away from home is “a relatively new phenomenon in southern Europe.” Minder reports that “only about 17 percent of students get their higher education away from their home region,” which explains why there are roughly 100,000 beds in student dorms in Spain in contrast with 1.6 million students in Spanish universities.

Investors tell Minder that about 450,000 more beds are needed to catch up with demand, which is the point, sort of. The investment flowing into Spain in order to fulfill a so far unmet market need is largely foreign. Brookfield Asset Management is a major player in Spain’s dorm boom despite being based in Toronto, Spanish developer Grupo Moraval is teaming up with Sweden’s EQT Exeter with an eye on investing $568 million in student housing, and then the largest student housing operator (Resa) was purchased by France-based AXA and U.S.-based CBRE in 2017. The quality of Spain’s educational evolution is proving very much a global endeavor. Which IS the point.

It’s hopefully a reminder to readers of a crucial truth regularly stated by the late Robert Mundell: “the only closed economy is the world economy.” And in this closed world economy, capital knows no borders. Instead, it moves with rapid-fire fashion around the world to the best opportunities commensurate with risk and return objectives of investors.

Along the lines of the above, it’s useful to digress slightly to the typical introductory meeting that takes place between financial advisers and those looking for a financial adviser. The good advisers logically ask lots of questions. Goals must be understood, but it’s more important to say that a level of risk aversion must be intimately understood.

At the meetings that Goldman Sachs private client representatives attend for prospective clients, it’s often made plain up front that potential clients don’t come to GS to get rich; rather they’re already rich as evidenced by the meeting. It’s a useful way for GS representatives to convey that in putting the wealth of clients to work, they’re not swinging for the fences. Goldman clients are already at the fence.

Still, rich people have different objectives in the way that all individuals do. Which leads to a basic question: what is your pain threshold? Of the money you would consider placing in GS’s care, how much in percentage terms would you be comfortable losing on paper? The answers are logically varied, which explains why no client investment plan inside GS resembles that of another. Goldman provides bespoke financial consulting, as do all manner of other private banks and investment advisers.

This digression hopefully makes sense in consideration of the always breathy commentary that follows statements from Federal Reserve officials. Some economists, pundits, and politicians watch what Fed officials say closely as a way of allegedly understanding if credit going forward will be “tight,” “loose,” or somewhere in between. What a waste of time.

To see why, consider yet again the capital that is set to transform and realistically modernize the college experience in Spain. It’s flowing in from all over the world. No doubt Spain has a central bank, no doubt it fiddles with rates in ways the Fed does, but investment is yet again global. Assuming Banco de Espana “tightens,” and assuming such a move actually shrinks credit availability in Spain, the shortfall will be dealt with by capital sources around the world.

To see why this is true, consider the clients of Goldman Sachs once again. Their answers to questions about risk, pain thresholds, and asset diversification are all a prelude to moving precious wealth to a variety of opportunities (including investment opportunities around the world) as part of a broad investment plan. Figure that if a client has wealth largely exposed to the U.S., it’s not unreasonable to speculate that GS and others like it will want to diversify the wealth across countries, and also across risk factors.

Applied to Spain, it’s no surprise that capital sources well away from it seek exposure to the country for diversity reasons, but also likely for return reasons. The bet here is that an investment in dorm space in Spain brings greater risk than the same in College Station, TX. Since it does, there will be a willingness among investors seeking higher yields to put wealth at greater risk in order achieve potentially greater reward.

Please keep all of this in mind with the Fed and other central banks top of mind. Their influence is wildly overstated, and it is precisely because what Minder describes as “a shortfall of about 450,000 beds needed” in Spain represents a diversification and return opportunity for investors well outside of Spain.

Central bank influenced interest rates? Who cares? In a world of globalized capital in search of a wide range of returns, central bank fiddling brings new meaning to meaningless.