Childcare property market sees 15 per cent increase in deals

Head of childcare Courtney Donaldson said the childcare property sector had fared better than most, while the average per nursery sale price is set to reach the pre-recession high of £1m this year.

Speaking at the launch of the property company's Business Outlook report for 2015, she said, 'Childcare is increasingly seen as a necessity and not a discretionary spend. Across all the sectors in which we operate childcare seems the least badly affected by the recession - especially when compared to areas such as pubs.

'Last year, activity was 12-15 per cent ahead of that in 2013 and I'd expect to see the same level this year, though the election will cause a period of stagnation of about six weeks.

'Of all the deals we completed last year the average value was £900,000 per nursery and we can see the average price in 2015 moving to £1m.'

Almost every sale last year resulted in a shortlist of experienced, well-funded buyers, Ms Donaldson added.

One of the first deals of the year was the £1.3m sale of 100-place Chrysalis Day Nursery in Cheshire to the owners of Happy Tots Day Nursery in Cumbria, who plan to expand further into the Midlands and the north.

While the vast majority of nurseries are privately owned, single settings, regional chains are set to form the majority of the buyers in 2015, she said. The majority of 2014 deals were similarly driven by 'the desires of regional and national chains to consolidate via acquisitions of single assets and groups.'

Ms Donaldson defined the regional model as two to ten nurseries 'wanting to expand in their local area - say within an hour's drive of a central point. They know their areas and which are the good locations for nurseries. Senior management can get around them all, and staff can be shared around the group. They don't want a scattergun approach, but are driven by quality'.

She said, 'We're seeing that replicated across England and Scotland. Not so much Wales because it is a quite different childcare market - children tend to go to nurseries in schools, while it's a different legislative environment.'

Increased demand has led to a shortage of opportunities to buy quality existing settings, so many existing chains are building their own, according to the report. This is either through development of new purpose-built premises or conversion of existing buildings. A recent relaxation in the planning laws has helped settings expand organically - Kids Academy is currently converting office accommodation for a 130-place setting in Warrington.

The report also cited Bright Horizons' 'supernursery' in Clapham Village and Kids Planet, which was founded in 2008, and has expanded via both purpose-built settings and public sector buildings that have been vacated in the recession, such as a former police station in Salford.

Increasing economic confidence is also driving growth through private capital. Regional operator Just Childcare, which currently has seven settings, has secured £30m funding through private equity firm Phoenix Equity, while Happy Days, which now has 16 nurseries in Devon and Cornwall, secured £3.9m of investment from Living Bridge Private Equity partners in 2012 to open six new settings across the South West over the next two years. 'This further underlines this growth in both investors' confidence and regional operators' willingness to grow their business in regional clusters,' Ms Donaldson added.

Meanwhile, increased access to bank finance has meant that there has been an increase in first-time buyers, often teachers and childminders, entering the market, says Ms Donaldson. While trade buyers - groups and owners of small settings - comprised 80 per cent of buyers, about 20 per cent were first time buyers, UK investors and buyers from abroad.

In terms of occupancy, Government-funded places may have contributed to an increase, but, says Ms Donaldson, free entitlement funding remains a 'fundamental issue to the long-term sustainability' of many childcare businesses.

She said, 'In the run up to the general election, I would dearly hope that all political parties gain a greater insight and understanding of issues relating to free entitlement funding. There is no doubt that the hourly rates awarded by local authorities need to increase to ensure the cost of delivery is fully funded.'

Overall, from a 'sluggish' 2012 to a 'hot' year last year, the sector can 'gain a lot of confidence' from the level of activity. '2013 was characterised by big corporate deals which gave the banks confidence which spread across the marketplace to owners and vendors,' she said. 'Last year was incredibly busy and we've started this year very positively.'