Work Matters: Property - Cautiously optimistic

With residential property values continuing to spiral downwards amid the banking chaos and commerce braced for a serious recession, the childcare sector appears to be bucking the trend. Indeed, it remains remarkably buoyant.

Estate agents around the country approached by Nursery World generally gave an upbeat assessment of the opportunities for selling and acquiring nurseries, although there is a general recognition that a new era of more realistic pricing has arrived. Nevertheless, while some agents have been complaining that they are often only selling one house a week, those involved in the nursery business remain relatively confident and busy.

Huddersfield-based brokers Redwoods Dowling Kerr (RDK) says it enjoyed a 'record month' in September, with agreed offers on 14 nurseries (freehold and leasehold) at a total value of £2.89m and eight nurseries sold with a value of £2.4m.

RDK's childcare negotiator Charmaine Stubley says, 'There is always high demand for nurseries in London and the surrounding areas, which accounted for most of the completions last month. However, I have noticed a considerable increase in the number of buyers looking for acquisition throughout the northwest and Yorkshire.'

She adds, 'Nurseries are a sound investment in the current climate, as the rising cost of living appears to be pushing mothers back into employment, increasing the demand for childcare.'

Nick Brown, director of valuations at the fledgling estate agents Amberglobe, shares this assessment. 'What we are finding is people who were thinking about selling up are now thinking about acquiring. It's an odd thing in the current climate, but the credit crunch is forcing people back to work longer hours and occupancy is going up,' he says.

He has not identified any real property 'hotspots', but he too believes that demand for childcare remains high in the northwest and that there are good prospects for nursery businesses in that area. He reckons that small- to medium-sized nursery businesses, with anything between five and 15 units, appear to be in the 'optimum position to seize opportunities to expand their businesses'.

But Sian Nisbett, director of Dizzy Ducks in Billericay, is proof that the market among smaller providers is alive and kicking. She currently has two thriving nurseries in the Essex town, is in the throes of purchasing another and already has her eyes on a fourth.

She says Billericay has provided good opportunities for childcare providers in recent years. She recalls when there were just two providers in the town five years ago, with only 60 places between them. Now there are five or six in the area and all have high occupancy levels.

Being sensible

Realistic pricing appears to be a crucial piece in the current nursery property jigsaw. Brian Hayes, senior partner at Reading-based estate agents AH Lansley, which sells around 20 nurseries a year, says, 'Vendors are being a bit more realistic. Some nurseries were being over-priced in a very buoyant market. But if it's a good business with good profit records they can still achieve a reasonable figure.'

Sian Nisbett advises potential buyers of nurseries to 'be sensible and look at the valuation that the bank is putting on a business rather than just accepting the vendor's asking price'. She knows of one provider who benefited to the tune of £300,000 because of the new market conditions that obliged a vendor to reduce the sale price of their nursery from £1.1m to £800,000.

As for the banks, there is clearly both concern and a high degree of uncertainty over their ability and willingness to support businesses with loans, given the current turmoil.

Courtney Donaldson, director and head of Child Centric Sectors at Christie and Co, which brokers deals involving some of the largest chains, says, 'The property market has become more challenging solely because of funding issues. The banks' lending criteria have tightened up and the cost of finance has increased, which makes deals more challenging. Deals are taking longer to complete because banks now have enhanced due diligence.'

But she emphasises that as a needs-driven industry, childcare is not affected by the current economic downturn in the way that other sectors are. 'There are a number of banks out there which still have an appetite and interest in the day nursery sector. They are still funding experienced operators with proven track records. They are more conservative with first-time buyers and far more conservative with leasehold premises.'

Brian Hayes believes there is 'still money out there for sensible requirements, and the banks in general are fairly upbeat about the nursery industry, so if you have a good case and you are not expecting to borrow over and above what is realistic, then the money is still available'. Borrowers can still expect to get loans of up to 70 per cent, he says, but adds, 'They have got to put a case that stands up - you can't massage the figures.'

Patrick Carter, who owns the Wiltshire-based National School Transfer company, sells around half a dozen nurseries a year. He admits that it is 'not really our stock-in-trade'. But he sees an opportunity emerging for those venturing into the market who are not saddled with debt and are cash buyers.

It's a view echoed by Busy Bees managing director John Woodward, who says, 'People who have cash or resources have a real opportunity. Those who have a lot of debt or who are heavily dependent on their property portfolio potentially have a problem.'

He confirms that while Busy Bees is currently 'going through the sales process', the Midlands-based chain is also purchasing a 'number of sites at the present time'. However, he believes that nursery businesses - many of whom do not have property expertise - need to tread cautiously in such turbulent waters.

'We have had the experience of trading during a previous recession, but lots of people have only traded in the good times and they are going to find it scary,' says Mr Woodward. 'I would be surprised if people do any substantial property deals unless they are in a position where they have to.'

He thinks that childcare is more recession-proof than other sectors and that since banks 'live by lending money', it is safer than other places to invest. And - as a sign that the gloom which has settled on large swathes of the UK economy does not automatically translate into problems for the day nursery sector - he cites the fact that at a time when Busy Bees is up for sale, its voucher business last month enjoyed its highest growth for two years and there have been approaches from 'interested parties' for the nursery business.

Graeme Scott, chief executive of the Bertram nursery group, which has expanded rapidly in the last two years, believes that those businesses that have over-borrowed may be forced to sell, while those who have 'good-quality businesses won't sell and will hold off for stronger markets'.

With a £20m facility in place from the Bank of Scotland, he says his company is sticking to its plans and is currently buying a further ten nurseries at a cost of around £5m. Kids Unlimited and Just Learning are the other two chains which have indicated plans to expand, following refinancing earlier this year.

Mr Scott believes that one of the by-products of the present market turmoil will be a switch back to 'more conventional ways' of growing businesses, either by management putting in their own money or venture capitalists taking an equity stake.

With so much uncertainty swirling around the financial markets, it's clear that the childcare sector is better placed to weather it - and even prosper - than other sectors. And, with more keenly priced nursery properties on the market, there are good opportunities for cash buyers. But, given the parlous state of the banks, lending conditions are certain to tighten even more in the coming months.

TIPS FOR THE TIMES

Always ensure you have a realistic business plan, advises Redwoods Dowling Kerr.

- Take expert advice about how to fund your venture and never over-borrow.

- In the current climate nurseries are seen as a sound investment, so it is essential to have provisional funding in place prior to making an offer, to ensure that you can move quickly once the right opportunity presents itself.

- Never accept management accounts, when carrying out your investment appraisal. Make sure that full trading accounts are available. Remember that childcare is seasonal and you must research all aspects of historic trends before making a decision to purchase a nursery.

- You must stick to your business objective, decide what type of business you are looking for and enlist the help of a specialist agent who can offer guidance throughout the process.