British universities face “reputational damage” from restrictions on immigration and the Home Office’s decision to strip London Metropolitan University of its right to sponsor foreign students, the university regulator has warned.

The Higher Education Funding Council for England (Hefce) said there was a risk that universities could be hit by a “slowdown of international student recruitment that is not reflected in institutional forecasts”.

In its annual review, Hefce says the sector is in good shape. But it notes that universities expects a 24.5 per cent increase in foreign fee income to 2014-15.

The report says “universities and colleges are projecting sound financial results to 2014-15. However, these forecasts were made . . . before the latest student recruitment cycle.”

It noted that some universities have also experienced difficulties in recruiting domestic students because of changes to rules governing student numbers.

Sir Alan Langlands, Hefce chief executive, said: “The overall financial position is satisfactory, although reductions in public funding, especially for capital investment, mean that institutions will need to deploy more of their own resources to maintain their estates.”

Hefce noted that the sector intends to spend around £8bn in the next three years on infrastructure. Of that, more than £3bn of the capital investment will take place in 2012-13. Most of this spending will be financed from retained cash.

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