All the signs of a market about to really take off

Ken Topping
Friday, March 16, 2018

Changes are afoot for Scottish nurseries with business rates exemption coming in from 1 April and the increase to 1140 hours by 2020

Now is a good time to be in the nursery sector in Scotland. Those operators who have stuck with their businesses through thick and thin are now seeing a combination of circumstances which must bring a smile to their faces.

There is no doubt that early years provision businesses have, like other commercial concerns in recent years, been buffeted by economic storms. A recovery in the sector has been hampered by a lack of readily available finance and by regulation.

The regulatory regime of the National Care Standards, which sets out what users should expect when using services, may have been seen as an imposition in its early iterations, but it is now seen as a positive and is widely accepted.

The upshot of this is that the standards are now almost fully absorbed – operators accept that they must comply – and those who don’t comply see an immediate impact in occupancy numbers and profitability.

Some nurseries have struggled to keep pace with such change and have been put on the market for sale. These are enterprises which may need work to bring them up to speed and there are some bargains to be had as a result. There nonetheless remains a shortage of good attractive propositions presently available for sale.

Another reason for the dearth of good nursery businesses on the market is the perception that they are difficult to sell, and some operators opt instead to continue to trade through any current difficulties.

However, the financial climate is improving all the time as banks ease off their restrictions on the sector and operators who have some measure of business experience now stand a fighting chance of securing funding.

I am not saying that this new environment is necessarily going to open the floodgates of lending, but I think banks are on the point of scenting a market which is about to take off. Their traffic light lending system is likely to switch from red/amber to amber/green.

There are three things a bank may typically look for. Applicants should: a) ideally be an existing bank customer; b) have a solid track record; c) be willing to put their own money into the venture.

Loans are now cheap and, if buyers can get over the initial financing obstacles, it makes sense to buy rather than lease, giving them an eventual property asset which can be sold on at a future date in conjunction with the nursery business operating from the premises.

Lack of supply of nursery places is not an issue at the moment, but that is about to change – dramatically.

Parents currently are entitled to 600 free hours of care per year under Scottish Government provision. That is going to increase to 1140 hours a year by 2020 creating, as some operators are already warning, a real shortage of provision.

Add into this mix the bonus that nursery businesses have recently been handed in the rating revaluation. From April 1 this year, they will be wholly exempt for non-domestic rates.

This is a major factor in any business’s financial planning and, for nurseries stretched by increasing overheads, wage pressures, Brexit-related staffing issues and occupancy worries, it could be a real game-changer.

There is little in the way of new build in the sector, since nurseries can adapt into so many types of properties - industrial buildings, offices, houses and former churches.

The ideal property may be single-storey with parking and garden space. With the plight of Churches and pubs closing to name but two, there are opportunities out there for new nursery ventures.

The fact is that the sector has transformed itself over the difficult lean years and the signs for it are now, justifiably, good. Whether they are corporate concerns or family affairs, nurseries now need lenders to become aware of their tremendous potential and support buyers in their route to acquisition.

Ken Topping is an RICS registered specialist business valuer in the Commercial Valuation department of the Hamilton office of DM Hall Chartered Surveyors.

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