Nursery Management: Property Market - On the move

Times may be tough, but for all those nurseries keeping their heads above water, there could be some comfort in the generally held view that trading conditions are unlikely to get worse.

Certainly after the credit crunch in 2008, the prediction was that nursery businesses wouldn't feel the full impact until a year or so down the line. This has proved the case, and in the last three years the sector has had to cope with the continued squeeze on lending, soaring staff and utility costs, swingeing local authority cuts and shortfalls in funding around the free entitlement.

However, market analysts Laing & Buisson testify to the market continuing to be relatively resilient. In its Children's Nurseries UK Market Report 2012, the 2011 market value represented the same in real terms as in 2007, confirming that the sector had not been as badly dented as many other service sectors. Strong growth in the under-fives population is identified as a contributing factor.

According to the report, 300 nursery chains accounted for 22 per cent of total UK day nursery places in 2011, with the top 20 groups accounting for the bulk of corporate market share, at around 10 per cent of total nursery places.

Meanwhile, the Government's move to extend free part-time places to 40 per cent of two-year-olds by 2014 is predicted to increase volume demand by 15 per cent - representing around 85,000 to 95,000 places. The value of this to businesses, according to Laing & Buisson, will ultimately be determined by the adequacy of local authority funding for the subsidised places.

Consolidation among the big groups has undoubtedly been stepped up in 2012. Last month Busy Bees, the UK's largest nursery provider, acquired the 71-strong chain Just Learning, bringing its total sites to 214. Earlier in the year Busy Bees also acquired Early Years Childcare's nine nurseries.

Another big deal, in May, was Bright Horizons Family Solutions' acquisition of all of Casterbridge Care Nurseries' 27 settings, while the Co-operative Childcare acquired the Petit Enfant Group of four settings.

LENDING DEVELOPMENTS

At Christie + Co, which was involved in different capacities in the sales of Casterbridge Nurseries, Early Years Childcare and Just Learning, the view is that there is growing confidence in the sector, both within and outside.

Director Courteney Donaldson (pictured)  says, 'Combined with a bank lending-landscape that appears to be a little more positive than in previous years, this has led to a busy 2012 from a transactional perspective.

'With the arteries now seemingly unblocked after a sluggish period, many nursery operators are looking to buy, sell, grow, shrink or refinance their businesses.'

This year has indeed seen some positive moves in terms of opening up finance to those who aim to start up or expand. First came the launch of the Government's National Loan Guarantee Scheme. This was followed in the summer by the Funding for Lending Scheme, which nudges banks and building societies into lending to SMEs.

Another welcome move was the release of £50m worth of lending, by Christie + Co. With the nursery sector entitled to a share of this, the available cash is identified as a spur to meeting demand for two-year-olds under the free expanded offer.

Ms Donaldson says, 'Of the £50m agreed in principle to be made available, £22.5m of funds have been secured by Christie Finance clients, of which £11m has drawn down so far.

We hope that with the Government's new Funding for Lending Scheme effectively taking over from the National Loan Guarantee Scheme, demand will be sustained.

'Interestingly, Christie Finance is witnessing a trend in existing leasehold operators seeking finance to relocate their leasehold business to nearby freeholds. It is apparent that these leasehold owners have been able to identify suitable freehold properties, whereby D1 premises classification consent is held or can be obtained. If they can acquire a suitable freehold property at a reasonable price, given market conditions and current commercial and residential values of vacant premises, this provides security of tenure and the opportunity to expand their business.'

This year has been a dynamic one for Redwoods Dowling Kerr, which reports it has sold more than 37 nurseries in the first seven months of the year. According to sales director Lucie Wright, (pictured below right) this averages at more than one nursery sale a week.

'Not only that, but the deals we have been involved in have been a mixed bag of new entrants and existing operators,' she says.

'Earlier this year, for example, we facilitated the confidential sale of a nursery in Oxfordshire to first-time buyers who came from outside of the sector. What was most notable about this particular deal was that the purchasers recognised the need to gain a full understanding of the challenges of working in the childcare sector. They then worked closely with the vendor and the nursery's staff to learn the correct skills and to hone their knowledge of the sector. This hands-on approach is being employed by more and more first-time buyers, and it is impressive to see that they appreciate that they must learn from existing operators and staff in order for the nursery to succeed.'

While this particular sale was for cash, and cash continues to be 'king', Ms Wright reports that Redwoods has also been involved in a number of deals where the purchaser was able to obtain bank funding.

She says, 'One example this year is our sale of Cotton Tails Day Nursery in Cheshire. The purchasers were a first-time buyer partnership who plan to eventually acquire a small chain of nurseries. In certain conditions it can actually be easier for a first-time buyer to obtain bank funding than before the recession, using the Government's Loan Guarantee Scheme. This has been of particular benefit to those first-time buyers who are already experienced in the childcare sector. For example, one of the purchasers of Cotton Tails had worked as both a nursery nurse and a qualified teacher.'

Many of its sales have also been to corporate groups, with whom it works collaboratively to assist expansion.

'While corporate groups were noticeably absent from the market place for some time, by the latter part of 2011 they had made a marked return with an appetite to buy,' says Ms Wright. 'This year we have facilitated sales to Bright Horizons, Caring Day Care, Alphabet House, Kids Planet Nurseries and Children 1st @ Breedon House, to name but a few. As corporate groups account for 21 per cent of the market share of nursery places, this is great news for the sector.'

ACCURATE VALUATIONS

Accurate valuations are essential in the current market and there are well-documented problems associated with getting these right for the sector. This is where specialist property consultants are invaluable, providing in-depth knowledge and being able to appreciate how specific aspects of expenditure and income affect the early years business.

Amberglobe's valuations director Nick Brown underlines the importance of getting an accurate valuation in order to successfully see a deal through.

'The main point to consider is that the value of a setting needs to stack up at any bank valuation,' he says. 'If a setting has been overvalued then funding will be difficult. So the best advice would be to get an honest, realistic guide to the value of your nursery. If the value sounds too good to be true, then it probably is!'

Christie + Co underlines the complexities that come into the mix - not least where nurseries are reliant on early years funding which is set by the local authority. It also points out that even if a business is being bought for cash, a specialist valuation is still essential.

Ms Donaldson says, 'When commissioning valuation reports, most lenders insist on specialist early years, childcare and education valuers like ourselves. Our clients benefit from our dedicated specialist child-centric team which handles this work.

'Given the fluctuating fortunes of the business property market over the last decade or two, it is no surprise that they take a rigorous approach to valuation. After all, many bank losses have been blamed on so-called "toxic property".'

Ms Donaldson says that one of the results of the last recession in the early 1990s was that lenders became much more cautious when it came to the accuracy of valuation reports. 'The property industry and the banks combined to look at the professional advice that was being provided at the time. The result was a set of revised valuation guidelines within the RICS's Appraisal and Valuation Manual, commonly referred to as the Red Book.'

She stresses that only qualified Chartered Valuation Surveyors, recognised by their MRICS or FRICS qualified RICS member status, can provide formal valuations. These are valuations used by and relied upon by owners, investors as banks for information, accountancy and secured lending purposes. For example, it was in this capacity as chartered surveyors, that Christie + Co acted in the Casterbridge and the Just Learning deals.

'There is quite a clear distinction between informal assessments of value for the purposes of providing marketing advice and setting a guide price and formal valuations as undertaken by qualified surveyors.' she says.

POSITIVE PROSPECTS

Redwood Dowling Kerr's Lucie Wright anticipates that the implementation of the revised EYFS will also have a positive effect on nursery sales going forward.

'For example, the requirement for providers to check the suitability of managers has been simplified,' she says. 'It is now up to the current owner of a nursery to determine the suitability of a new owner or manager, where previously this was done by Ofsted.

The pursuit of economies of scale will also continue to be a driving factor, according to Amberglobe's Nick Brown. He says, 'We are seeing several of the small group operators buying nurseries within their geographical trading area, which then enables then to reduce or share costs with a new setting. This is done by being able to share staff between settings and other related day-to-day costs.'

Amberglobe reports good demand for nurseries across the country - particularly within the M25, where there is a strong appetite for both leasehold and freehold settings.

'A couple of examples of this are two leasehold nurseries in central London which have come to market and due to the demand, there has had to be in excess of ten viewings at each, and offers within the first week of marketing,' says Mr Brown.

He adds, 'Although we have heard a lot of bad news about funding, we are now finding that our broker whom we use for all our nursery funding has managed to secure successful funding on all the propositions we have placed with him.'

We Buy Day Nurseries, a company focused on London and the home counties, is finding that demand within the M25 is outstripped by supply. Part of the PMD Group, the company specialises in funding on a joint venture basis for managers wishing to buy the nursery they work within, and also for day nursery professionals generally who have identified a property or location to start their own nursery business.

Director Ibi Alan says, 'While affluent locations within and around the M25 are considered more stable areas to invest in, there is lack of activity as many nursery owners in this area do not wish to sell at present values, given that their businesses are performing very well.'

FURTHER CONSOLIDATION

At GP Surveyors, company manager Jacqui Johnson (below) is seeing a significant number of nurseries investigating ways of accommodating more children in their premises through extensions, developments or simple restructures. She expects this to rise significantly over the coming year as the UK prepares for the roll-out of places for all disadvantaged two-year-olds in September 2013.

'Dominant nursery chains are really taking advantage of increasing numbers and are being pro-active in seeking more acquisitions to boost their portfolios,' she says.

'At the other end of the scale, less business-minded nurseries are only just staying afloat, particularly in areas where parents are struggling to pay fees because their child tax credits were cut in the 2012 budget.'

However, she also notes this is a great market for investors because an increasing number of small operators are looking to sell to larger players, although high demand from investors still exceeds the amount of nursery stock available to purchase.

'Nevertheless, sellers should not be fooled into thinking that their property or business will sell with minimal effort,' says Ms Johnson. 'The business must stand up to intense scrutiny from buyers - they will not invest in a sinking ship.

'In times of recession, many people decide to take the plunge and start their own business. However, nursery start-ups are more likely to gain funding from a bank if they plan to buy an established business rather than starting a new one from scratch. This lack of new nurseries entering the market is only adding to the increase in consolidation.'

She thinks that funding for new ventures is indeed harder to come by and only the most entrepreneurial people will succeed.

'Nurseries need a bullet-proof business plan and must be willing to spend time researching the best deals on loans, funding, and other schemes. They must also be willing to adapt their business plans to fit with the requirements of funders to ensure the best chance of success.'

GP Surveyors is also seeing a rise in the number of businesses looking to sell and leaseback their nursery.

'This is either because they are doing well and want to release equity to invest in additional premises, or because they are struggling financially and need to release equity to continue operating.

'As with any industry in an economic downturn, the gap between businesses who are innovative and commercial and those that aren't is getting wider. Those that lease space to other providers, such as after-school and holiday clubs, are thriving because of the additional income they receive and the competitive edge that these services provide. These nurseries are also being more pro-active in negotiating more preferable rents and business rates, whether they are a tenant or investor.'

On balance, the advice from GP Surveyors is to be forward-thinking and not to go it alone during this time of change. Ms Johnson says, 'Nurseries should engage with specialist early years advisors at all stages of the development of their business to ensure commercial success. Only time will tell whether the economic downturn will see further consolidation or whether the innovative independents will hold their own.'

VIRTUOUS VENDORS

Advice from Christie + Co

Buyers, and their funders, will seek the most accurate valuation for the business they are proposing to buy. Therefore, to maximise value and present their business well to buyers, there are a few tips that sellers (vendors) would do well to absorb.

- Vendors should think like buyers, maintain their businesses well and run the sale process with as much passion, enthusiasm and professionalism as they run the businesses themselves.

- Buyers are attracted by a well-presented property, but more so by good levels of occupancy and fees. They will focus on the nursery's management accounts, so it is wise not to try to paper over any perceived cracks. Accuracy is everything. If your business has experienced low occupancy it is not the end of the world, though buyers may seize on this in order to leverage a lower valuation.

- The key thing to remember - and this will help maintain value during a potentially long process - is to carry on your business as normal.

- So whether buying or selling, it surely is a case of caveat emptor and caveat venditor - and the best way to securing the most accurate and best valuation from either perspective is to seek professional advice from the specialists.

Further information

• www.christie.com
• www.amberglobe.co.uk
• www.redwoodsdk.com
• www.WeBuyDay Nurseries.co.uk
• www.nurseries.gpsurveyors.co.uk