Growing children's nurseries market now worth £4.9bn

The annual survey of the childcare market puts the value of day nurseries in the UK at £4.9bn, a rise of 4 per cent in real terms.

The report analyses the full daycare nursery sector, but does not take into account sessional care providers or childminders.

The LaingBuisson report reveals optimistic expectations from nursery businesses and from investors.

Economist Philip Blackburn, the report's author, told Nursery World, 'Optimism is much stronger. A lot of nurseries are in a good position. The economy is lifting and the labour market is lifting to support demand.

'There seems to be a big shift in momentum towards growth, which was fairly stable in the past few years and it's starting to grow again.'

Mr Blackburn said that bank lending has improved and that nurseries have better cash flow.

'A lot of overseas investors are interested in bigger firms. There is not an absence of investment - we will see some stronger growth.'

Findings from the Children's Nurseries UK Market Report 2014 also show a 6.5 per cent rise in the number of children attending nurseries, although children's attendance was shorter than during the previous period.

Demand was driven by the Government's expansion of subsidised two-year-old places, which was achieved through a combination of spare existing capacity and new capacity.

LaingBuisson attributes the rise in demand to stronger economic growth, a high early years population, and the ongoing rise in more mothers returning to work.

According to the report, 42 per cent of mothers with children under four were working full time in 2013 compared to 34 per cent in 2003.

A year ago, LaingBuisson estimated that funded places for two-year-olds would lead to a growth in the number of children attending nurseries by 10-15 per cent in total over three years.

The report says that 'current take-up confirms the top end of this projection is certainly more likely at the moment'.

According to the report, the daycare nursery market was estimated at £4.89bn for the financial year 2013/14. Private sector nurseries generated an income of £4.07bn, 83 per cent of the total market value.

Nursery groups - defined as companies, sole traders, partnerships and third sector organisations operating or managing three or more nurseries, and any stock exchange-listed company - accounted for 24.6 per cent of nursery places in June-July 2014, up from 22.7 per cent in 2013.

Commenting on salaries, Mr Blackburn said, 'There has been a small pick-up in rates of pay across categories.' Pay in the nursery sector was still marginally below inflation, but this was 'a sector where pay has struggled to increase, consistent with the economic cycle'.

Nursery sector capacity

Growth in 2013/14 was driven by an increase in net nursery stock, as more nurseries opened than closed.

New development was fragmented as numerous smaller-scale businesses have sought to expand locally, and many regional-based groups have increased coverage in their area.

Growth was not just restricted to the big nursery groups, Mr Blackburn said, highlighting 'careful expansion' among a lot of smaller and medium-sized nurseries that are expanding.

'A lot of nursery groups with two or three (nurseries) are looking for another setting in their region,' he said.

However, there were some nursery closures due to excess capacity in some areas, and tight fiscal budgets in the public sector.

Fees

There has been no real increase in fees. LaingBuisson asked nurseries by what percentage their fees had changed over the past 12 months.

At mid-2014, the average reported rise was 1.8 per cent, compared with 2.6 per cent a year earlier.

LaingBuisson's nursery fee data from 2004-2013/14 inclusive indicated that fees rose on average by about 3.5 per cent a year, compared with economy inflation (as measured by Retail Price Index - RPI) of 3-3.5 per cent. Fees mostly grew by no more than RPI.

Occupancy

This year, in the 13th edition of the report, LaingBuisson has introduced a new 'attendance based' occupancy rate, which it says is 'a logistical indicator for nursery businesses, which illustrates the proportion of all available nursery sessions which are filled at a specific period of time whether sessions can be practically filled or not. A nursery would experience 100 per cent attendance-based occupancy when it has no sessions to fill in its nursery during a week at a specific time during the year.'

The new measure has been introduced alongside the usual 'vacancy-based' occupancy rate.

Stronger demand led to a rise in occupancy between mid-2013 and mid-2014.

LaingBuisson's new attendance-based measure for occupancy showed a rise from an estimated 67 per cent in mid-2013 to 69.5 per cent in mid-2014.

The vacancy-based occupancy rate moved to 83 per cent from 81 per cent a year earlier.

Looking ahead

The report also highlights risks to the sector's growth.

This includes a fall in the under-fives population, potential overcrowding of capacity in some areas, and staffing and skills shortages as capacity expands.

Mr Blackburn highlighted the big drop in the birth rate in 2013, pointing out that projections for the growth of the early years sector had been made in 2002.

The report also highlighted nurseries' increased dependency on funded places for two-, threeand four-year-olds and the impact of the fall in subsidies for places in real terms, after inflation was taken into account.

Commenting on the ongoing issue of underfunding in the sector, Mr Blackburn said, 'If nurseries are making a loss of 20 per cent on early years funding, and funding has been loss-making for more than 10 years, it begs the question where this shortfall is made up, and how so many nurseries have been operating for so long under this funding regime.

'I suspect price/margin cross-subsidies are commonplace in the sector (where margins on self-pay business compensate for an absence of margins on local authority entitlement funding), which creates an inefficient pricing model for the sector, and actually may lift the price of childcare for self-payers. There are a lot of question marks over early years funding that need clarifying to ensure childcare is being priced efficiently.'

He also said that there was concern among some nursery owners that there were not enough qualified staff to support growth.

In the short-term, LaingBuisson says prospects for the children's nurseries market are 'favourable'.

There was also 'a distinct possibility,' Mr Blackburn said, that the market would grow more quickly than demand, as it had done before the recession.

There was also a risk from schools, particularly with their increased freedom to take younger children, although he acknowledged that some schools were keen to partner with nurseries rather than offer nursery provision themselves.

Mr Blackburn added, 'Overall, positive demand drivers going forward support market expansion at a reasonable rate, supported by favourable economic and investment conditions, and by progressive Government funding policy approaching a general election, but dependent on the availability of additional nursery staff.

'However, longer-term demand drivers for nurseries are less certain, and as a mature market, demand and supply is vulnerable to cyclical shifts. It is also a sector where regular and ongoing political and regulatory changes may have a significant impact on prosperity at any time.'

• The Children's Nurseries UK Market Report 13th edition costs £1,160, including a printed copy, PDF and Excel data files. Hard copy-only also available. www.laingbuisson.co.uk