Slow and steady is the outlook for the nursery property market in the year ahead. 'The year will continue to be difficult but we are coming out of the recession,' believes Nick Brown, valuations director at Amberglobe.
'The worst possible scenario is that there is a good business for sale and no-one is looking but that's not the case in the childcare sector,' he says. Agents agree that if a quality setting is put on the market at a realistic price, then even in the current uncertain economic climate there is no problem in finding a buyer.
Redwoods Dowling Kerr recently had three viewings within three weeks of a freehold property being put up for sale. Two acceptable offers, one freehold and one leasehold, were made after just four weeks. But agents warn that nursery owners must do their research, take time to understand the current market price and speak to a specialist before offering their business for sale.
'Sales are happening but people are not going to get silly premiums,' says Amberglobe's Mr Brown. 'Gone are the times when there was a 20 per cent profit just because it was a nursery. Now if it is worth £300,000 the seller will get £300,000. It all has to stack up on profit when the banks look at the business. We deal with a lot of valuers and if there was a tick list criteria it has certainly got a lot longer in the past five years. The business has to stand up to scrutiny.'
Mr Brown emphasises that vendors need to be realistic. 'I valued a nursery recently at £200,000 and two other agents valued it at £450,000. I would have loved to put it on the market at that price but it would never have sold,' he says.
LACK OF HIGH PERFORMERS
Banks have become much more cautious about lending and Andrew Steen, sales director at Redwoods Dowling Kerr, says it is getting tougher for first time buyers to enter the sector. 'They need a good deposit or experience in the early years to be taken seriously by the banks,' he says. 'However, we are finding that first time buyers who are suitably prepared have an excellent chance of acquiring established nurseries.'
The Enterprise Finance Guarantee (EFG) scheme was launched in 2009 to help small and medium businesses without sufficient security obtain a normal commercial loan. The scheme has enabled a number of aspiring nursery owners to enter the sector.
'Ninety per cent of people are borrowing money, there are very few cash buyers,' says Mr Brown. 'The emphasis has gone from a lot of cash to assets. We use EFG quite a lot, it has been a good tool. The rates are not the cheapest but it does give people another option. First time buyers are especially being helped by the scheme.'
Redwoods Dowling Kerr has seen an increase in unit sales in the past 12 months of 14 per cent - which works out at selling more than one nursery per week. 'In our opinion the sector has proven resilient to the recession and we are pleased to report an increase in both unit sales and in the average sale price of nurseries,' says Mr Steen.
FEWER TRANSACTIONS
However, the bigger picture is not as bright. There has been a lack of high-performing freehold nurseries offered for sale recently despite buyers, especially large nursery chains, being keen to acquire good quality businesses. This has led to nursery owners finding properties to convert or buying suitable land to build premises instead.
Courteney Donaldson, director at Christie + Co, explains, 'The challenge last year was that very few of our operators of good quality settings were willing to exit because ultimately their businesses were doing well.
'Property values have fallen and accessing funding for providers has become more challenging. Talking to other agents we envisage that there were no more than 100 single asset nursery sales last year. Around 75 per cent of these were leasehold and 50 per cent were very small, with 40 to 50 places, so sold for low premiums. Usually there are 500 nurseries sold each year, excluding the big groups.'
Ms Donaldson believes the increase in leasehold sales is because owners have not been able to achieve the target freehold value so have retained the freehold and created a leasehold.
DISTRESSED SALES TO RISE
While overall the private sector has managed to adapt to the challenges of the recession, Mr Steen views it as a two-tier market. 'There's a split of very strong performing nurseries and then there are the ones in those areas that have been hit by parental redundancies and have struggled to fill places,' he says.
The Government's Comprehensive Spending Review, coupled with the increase in VAT to 20 per cent and rising utility costs, could potentially place further pressure on nursery operators this year. Christie + Co believes that there is likely to be an increase in the number of nurseries that cease trading.
The expected rise in interest rates will also see an increase in the number in owners of highly leveraged nurseries 'pursuing an exit', predicts Ms Donaldson, because banks are likely to be less sympathetic towards nurseries which cannot keep up with their payments.
'The banks will coerce an agreeable exit to release the capital. They will not be seen to be in administration because if they are in distress vendors will go in at a low price,' she comments. 'Again, if they are put up for sale at the right price and marketed correctly then agents believe there are plenty of buyers who will show an interest.'
But hardest hit are expected to be local authority settings. 'Already this year we have received numerous phone calls from property departments and early years teams around the country to discuss the Government cuts and where it leaves them in regards to provision in deprived areas. At that end of the market there is going to be a great deal of upheaval,' warns Ms Donaldson.
'Despite having a reasonable occupancy rate, settings will have to stop trading because they have extremely high staff costs and low fees. The private sector just can't sustain this so many will not go on the market. We will start to see this scenario from April onwards.'
PROPERTIES RECENTLY SOLD
- Providence Nursery in Halifax, West Yorkshire, asking price freehold of £599,950. Purchased by a first time buyer looking to buy more nurseries to form a group. Sold by Redwoods Dowling Kerr.
- Brambley Tots nursery is a freehold, located in Biggleswade, Bedfordshire, asking price of £760,000. Purchased by an existing operator with one nursery looking to buy more nurseries in the future. Sold by Redwoods Dowling Kerr.
- Cobham, Surrey nursery, asking price leasehold of £65,000. Purchased by a first time buyer. Sold by Amberglobe.
- Daventry, Northamptonshire nursery, asking price leasehold of £165,000. Purchased by an existing operator looking to expand. Sold by Amberglobe.
Christie + Co's predictions for 2011
- Further pressure on nurseries which have historically been heavily subsidised or highly reliant on grants.
- Rise in distressed assets and closure of unsustainable nurseries.
- Emergence of new deal structures, with vendors possibly retaining small equity stakes.
- Further consolidation in the day nursery sector between national and regional groups.
