I have previously mentioned the effect the recession is having on the nursery sector, especially on occupancy and profit. However, a recent transaction within my company has identified a rather dramatic twist which could have quite radical consequences over the next few years. I refer to the current 'downgrading' of nursery valuations by professional advisers.
Since 1997, nurseries have usually been valued as a multiple of earning, expressed in a way which takes account of various exclusions. This multiple has traditionally been fixed at six and a half times such earning and, as such, is similar to other sectors. While many thought this level was slightly low when it was fixed, it was possible to show a solid business-like return on nursery investment at that level. As a result, there has been an unprecedented growth in new, purpose-built nurseries over the past 12 years, which has been one of the factors contributing to rising standards.
But professional valuers are now changing this multiple to take into account the fact that no-one is really in the market at the moment as a willing seller or realistic buyer. This is largely caused by the lack of bank lending, which is in turn exacerbated by market uncertainties regarding unemployment. They want the multiple to be reduced by a massive 30 per cent.
Consequently most nurseries, even if they are successful in terms of their current occupancy, barely cover their build cost under this method of valuing. This is sending out a disastrous message to banks and other lending institutions when considering new nursery development. It is highly unlikely that any bank will lend unless other major guarantees can be provided.
Given that many nurseries are closing and this valuation change will prevent new developments, there will be a material drop in provision available over the next three years which could go as high as 7.5 per cent.
Perhaps the time has come for the sector to discuss a new presentational method of fixing valuations which offers a realistic range of worth, rather than simply valuing everything as if it were a 'fire-sale' under these extreme financial circumstances.
- Alan Bentley is chairman of The Childcare Corporation.
