Leading property companies have begun on a high note this year, buoyed by a strong performance in 2012 and a positive outlook for 2013.
Christie + Co childcare director Courteney Donaldson says that the deal landscape in the nursery and childcare sector in 2012 was - 'Quite remarkable, driven by the need for vendors to exit as financial arrangements came to an end and a desire to invest funds elsewhere. This created opportunities for purchasers, who were not in short supply.'
Christie + Co says it is delighted to have played a role in 'just about all' of the year's major corporate deals, while also continuing to trade actively in the regional and independent environment.
By the end of 2012, around £200m worth of children's day nurseries were transacted, with Christie + Co having a pivotal role in a significant number of them. Its advisory team provided formal RICS Red Book valuations with an aggregate value close to half a billion pounds. But can it top that in 2013?
Ms Donaldson says, 'The short answer is "unlikely". However, in a marketplace brimming with confidence - despite the regulatory and legislative brickbats being hurled at it - we're likely to see as many, if not more, transactions, if not to the same value. Sales during the year are likely to be driven by regional transactions and the disposals of smaller group operators.
She adds, 'The sector is not short of suitors and potential investors. Whether they'll be inclined to keep their hands in their pockets while the regulatory environment settles down, we can only wait and see - but it has to be a concern.'
'SENSIBLE PRICES'
Amberglobe has had a 'bumper' start to the year, with enquiries and accepted offers for both
leasehold and freehold childcare settings across the country. The sales team is highly optimistic that the trend will continue into 2013.
The company's valuations director, Nick Brown, says, 'A key issue for nursery owners who are looking to sell is to price their business at a sensible and realistic level. Getting advice as to the value of their nursery from the very outset is essential.'
Mr Brown believes funding for the purchasers is reliant on several factors but the profitability and value of the real estate (if applicable) are the main drivers, and it's crucial to get these right from the start - 'Particularly when nearly all agreed sales are subject to a formal valuation by one of the major lenders.'
'There are several lenders in the market at the moment that are aggressively targeting the childcare market and in 2012 our independent finance broker secured sanctioned lending for in excess of £37m for purchasers in different deals across the country.'
Amberglobe reports that it is also seeing strong demand for smaller settings where new entrants to the marketplace, and experienced staff who want to branch out on their own, are driving this end of the market.
ACTIVITY ACROSS THE SPECTRUM
Lucie Wright, sales director at Redwoods Dowling Kerr, testifies to the marked increase in corporate activity in 2012. The company expects this trend to continue, with larger groups looking to grow and add quality settings to their existing portfolios.
'A good example of this is the acquisition by Treetops Day Nurseries of three of the Toybox settings in Bedfordshire and Hertfordshire, which was facilitated by ourselves,' says Ms Wright. 'I also expect increased acquisition activity to cascade down to small entrepreneurial groups that will grow by acquiring other small groups as well as acquiring single settings.'
She predicts there will continue to be a level of distressed sales in the market and, like Amberglobe's Nick Brown, says the key to exit for these operators will be realistic pricing with the desire to move quickly by all parties.
'Overall, nurseries of all types are selling and attracting interest across the full setting and registration spectrum. People at the top end are looking to buy, and new entrants are looking for smaller nurseries, usually those priced below the £100,000 mark,' she says.
Redwoods Dowling Kerr reports an increase in the number of poor performing nurseries being bought by corporate operators that can move quickly on a turnaround basis.
'Additionally, we expect a relatively even regional split in terms of sales in line with 2012, where 36 per cent of Redwoods Dowling Kerr's sales were southern sales, 34 per cent were northern sales, and 30 per cent were sales in the Midlands,' says Ms Wright.
The outlook for prices is that multiples for leaseholds will remain stable, she adds, with the exception of everything inside the M25, where the group is seeing premium multiples for leaseholds for specialist nurseries and schools. Meanwhile, multiples for freeholds have strengthened in 2012 and Ms Wright expects this trend to continue for high performing sites.
'Top quality nurseries are being recognised and we are seeing attractive premiums being achieved,' she says. 'I also feel that freehold nurseries will start to gain more traction in the market. Last year, 22 per cent of Redwoods Dowling Kerr's sales were freehold nurseries.'
CONCERN OVER RATIOS
Ms Donaldson is concerned that Government attempts to improve quality and cut the cost of childcare by increasing staff-to-children ratios could impact on quality, increase risk and hit nursery operators hard.
'Of course, we all want to see improving quality and qualifications across the early years workforce, but changes in ratios might compromise outcomes for children and impact on quality and safety,' she says.
Inevitably, with increased risk comes the nervous investor. 'Banks and investors are much more likely to back those nurseries that are prepared to mitigate risk by adhering to existing ratios. Increasing ratios increases risk, and banks and investors are naturally risk averse,' Ms Donaldson explains.
In recent weeks, an increasing number of bankers have been quietly expressing their concerns on the proposed revision of ratios. According to Ms Donaldson, should the revised ratios be legislated, bank credit sanctioning teams may, in a bid to mitigate risk, devise policies that see funds being sanctioned subject to ratio conditions. Thus, lending decisions could be made depending on ratio arrangements in individual nursery businesses.
'The worst-case scenario could see operators that intend to use higher ratios as a matter of daily business no longer be financially supported in terms of the provisions of term loans or overdraft facilities by some banks,' she says.
At Amberglobe, Mr Brown believes it is difficult to pre-judge what the new changes relating to staffing levels will have on the market at such an early stage. 'But for nursery owners, this may enable them to have more flexibility within different rooms at different times of the day,' he adds.
'The offset of this is that in some settings qualifications of the staff will need to be improved. I suspect only time will tell.'
Meanwhile, Ms Donaldson points out that there's no such threat of a fall in confidence across the Atlantic, where Bright Horizons made its debut on the New York Stock Exchange in January. Investors swooped on the Bain Capital-backed group, and saw shares in the company rise by 32 per cent on the first day and the value of the company soared to about $1.78bn.
She says, 'This demonstrates what sure-fire business winners day nurseries are - certainly where they are allowed to operate without being strangled by red tape.'
FURTHER INFORMATION
