Courteney Donaldson, managing director of childcare and education, said rising costs and 30 hours are resulting in the creation of a two-tier early education system, where nurseries catering for richer parents buying more hours are able to offset stagnant Government funding and rising costs.
She said, ‘We have seen an increasingly divergent landscape. Nurseries doing well are doing very well. These are well prepared for 30 hours, in locations which are more affluent' and they 'can reinvest in their business and their people'.
However, settings catering for poorer parents ‘accessing a nursery simply to access 30 hours’ are struggling to meet rising costs, she said.
With the National Living Wage (NLW) set to go up again this April to £8.21 for 25-year-olds and over, many settings are saying that maintaining pay differentials between levels of staff will be difficult.
Speaking before the launch of the property specialist's 2019 Business Outlook report, Ms Donaldson said, ‘It comes down to where settings are located and the fees they can charge. Some of the larger most resilient nurseries that sold last year - few of them were paying NLW – they were paying significantly more than that from practitioner level upwards. Many operators without that profit are in locations that can’t carry the costs.’
These challenges have extended from single sites to small groups, some of whom are also selling off their less sustainable nurseries on the quiet, without publicising it to staff or parents. ‘These are not big corporates – these are regional groups selling in ones and twos. Operators are looking at their costs far more closely – they may not want to sell off nurseries, but sometimes better to sell to a first-time buyer or someone with a couple of nurseries who can nurture it.’
Increased closures of smaller settings (in England) is now a well-documented trend, one Ms Donaldson has reported for the past two years. Ceeda data from October also found the number of childcare places per head has fallen in the most deprived local authority areas but increased in the least deprived areas, while a Nursery World investigation and Ofsted figures indicate small settings tend to be most likely to close.
The loss of smaller nurseries is having an impact on the most vulnerable children in these settings. Bigger operators were supplementing the cost ‘for some of the SEND underfunding', she said, while ‘smaller nurseries won’t be able to make that decision – though some have continued to offer support on a case by case basis.’
Despite Brexit, the market remains buoyant, with roughly stable deal volume on last year. ‘Uncertainty can impact on confidence, but we have not seen any slowdown in activity. In fact', said Ms Donaldson, ‘more and more banks are encouraging the nursery sector (particularly regional groups) to buy more settings so they can lend. They see them as being resilient.’
This gap between profitable nurseries in affluent areas and those in the poorest areas is being reflected in sale prices.
She said, ‘Quality assets being sold are achieving significant multiples. The overall average price is up by 8 per cent compared with last year.’ At the top end, for groups of at least, say, five nurseries of outstanding quality making £600-700,000 annual profit, she has calculated a 12 per cent increase. But she has also ‘seen an increase in nurseries coming to the market and barely breaking even - even making a loss’. Purchasers look at various aspects such as the leasehold/freehold situation, profit and loss, as well as location and demographic, she added.
Activity remains centred around key areas and is continuing across England, Scotland and Wales. Hotspots in England are London and the south east plus pockets around Nottingham, Birmingham and Manchester.
‘The childcare sector as a whole is a very attractive global sector’ with high demand for quality businesses – single settings or groups from a range of investors from abroad. ‘Save for the regulatory environment and political backdrop, and differences with qualifications, the model is simple, easily understood and can be replicated’ Ms Donaldson said.
While the first large European group came into the UK childcare market in 2017, with Les Petits Chaperons Rouges’ purchase of Magic Nurseries and Kiddi Caru, 2018 saw foreign investment from further abroad. Chinese education investors JiaYi bought four-strong chain Bambinos in Plymouth in April, while in December Icelandic group Hjalli Model acquired Elmwood Nursery School near Glasgow.
Ms Donaldson said, ‘We will continue to see that happening; interest has heightened since last year.’ She added there had already been interest from several European groups in sales this year.
Warning on China
China remains the UK’s biggest market for investment, with Europe second, and has been heavily focused upon by the Department of International Trade wishing to promote British early years expertise as an export. Consequently, several UK operators, large and small, have taken up offers to launch in China. Ms Donaldson said, ‘If you get a letter through the door saying we like the look of your nursery and we’d like to invest, it can be very flattering.’
However, there are emerging signs of Chinese Government involvement resulting in tensions over the curriculum and new early years legislation, principally:
1: Fee restrictions – parents can’t be charged more than a certain amount set by the local education authorities
2: Restrictions on the nature and type of investment that is coming in the country from overseas
3: Restrictions on where outbound capital can go.
Ms Donaldson said, ‘Increasingly the government is mindful about how rapidly the early years market has been growing. It’s about controlling it to make sure the sector does become regulated and ensuring parents they have a choice [about how much to pay].
‘Some providers who have ventured into China and opened already haven’t found it as easy as they hoped. There have been challenges about what they were looking for and what China is looking for.'
For example, last year when government inspected Montessori nurseries in ‘certain provinces’, operators were told to move away from Montessori education towards a more traditional Chinese teaching approach, she said.
‘This has been seen by some settings that deliver EYFS as well. Montessori has been around for a long time in China as has the EYFS – but growth in the sector is putting it under the spotlight. Under these systems there’s a big focus on the child – with free activity, child initiated. Historically China’s approach has been far more structured.
‘Knowing the operating environment and regulatory framework, and doing due diligence is crucial. My concern is some operators have seen this as an opportunity and leapt at it, and may not have undertaken all the due diligence that you need to undertake.’
Small operators may also find it more time-consuming than they expect to manage, especially if they are a key decision maker in the UK. ‘You can’t just nip up the M6 if you’re in China,’ says Ms Donaldson.
- The full report is available here: https://bit.ly/2RuAqH2