Supply is low yet buyer appetite remains for independent schools

Following a period of stagnated activity in 2021, due largely to the pandemic, it was clear from the start of 2022 that confidence and growth appetite had been regained across the childcare and education markets, says Christie & Co.

Despite this, the broker reports a suppressed number of operational independent school transactions in 2022 compared with previous years, which was primarily due to financial performances being largely distorted for the academic years ending 2021 and 2022.

An increasing number of independent education business casualties came to the market in 2022, as the gap between schools sustainably succeeding and those in untenable financial predicaments widened. Christie & Co also saw a rise in smaller provincial prep schools facing acute financial challenges, some of which were insolvent pre-pandemic but sought to battle on in the hope that prospects would improve. Such increase in vacant former independent schools being brought to market - many of which present renovation potential - was met with great interest from buyers across the specialist sectors.

The independent schools market continues to be highly fragmented and, therefore, opportunities for corporate groups and investors to acquire via portfolio buy and build strategies are not as prevalent compared with the volume of opportunities awarded by other operational real estate sectors.

The pool of prospective buyers continues to be significantly smaller than it is for other childcare and education asset-backed businesses. For independent schools, this is largely due to considerations relating to charitable versus for-profit business status, the composition of the market, and the requisite skills needed, which can create additional complexities in transactions, while different factors relate to the pool of buyers seeking language colleges, private tuition, and vocational training businesses.

London and the South West remain key hotspots for buyers and investors, and there remains no shortage of appetite from those looking to acquire the UK’s most prestigious educational assets.

Pricing index

Competitive bidding between buyers and an increase in high-quality assets coming to the market fuelled a price increase of 6.3 per cent in 2022. Anticipating a rise in the volume of assets of differing quality coming to the market in 2023, Christie & Co expects a slightly lower price index movement for some assets this year.

Sentiment Survey

The business property adviser anonymously surveyed childcare and education professionals from across the UK to gather their views on the year ahead. When asked about their sentiment for 2023, 33 per cent said they feel positive, 35 per cent feel neutral, and 32 per cent feel negative. When asked about their sale and acquisition plans, 73 per cent said they’re looking to either buy, sell or both in 2023.

Funding Landscape

In a segment on funding in the sector, Christie Finance notes that, in 2023, there is likely to be an increase in borrowers seeking refinancing opportunities. Some SMEs that have seen diminishing revenues and earnings could encounter reduced enthusiasm from their incumbent lenders, subject to business specifics and financial performances. Despite energy costs, base rate increases, and a mass of political changes, financially sustainable, high-quality, well-managed childcare and education businesses with good leadership should remain a stable lend for banks and investors.

Market Predictions

In the year ahead, Christie & Co expects:

• Independent mainstream schools, both day and boarding, with capacity for 1,250+ pupils will remain sought-after by domestic and international buyers
• Further divergence between successful sustainable schools and struggling schools
• Surplus margin erosion will be evidenced by independent schools unable to offset operational costs via adequate annual fee increases
• Potential pupil number diminution to be experienced by smaller schools in less affluent areas
• With a general election looming, Labour’s plans to charge VAT on school fees due to the extent of the UK Government’s COVID-19 and energy crisis-related borrowings could create further uncertainty
• Increasing due diligence associated with potential political policy changes and risk will increasingly be at the forefront of buyer’s thoughts, leading to enhanced sensitivity analysis
• Closed and vacant former education establishments will continue to secure strong interest from specialist SEND providers

Sophie Willcox, Director – Childcare & Education at Christie & Co, comments, “Appetite continues to come from a wide pool of buyers, many of whom have educational backgrounds. There is a particular increase in interest from buyers for smaller provincial schools - a shift in trend compared with pre-pandemic times - as well as a renewed interest from overseas school operators, perhaps seeking to ensure that they have a UK presence. For schools making the difficult, and often incredibly emotional, decision to close, a small degree of comfort can be taken from knowing that school buildings remain in demand from buyers that seek to create and deliver specialist education services.”

For the full report, visit: christie.com/business-outlook-2023

For further information on this press release, contact:
Phoebe Burrows, Corporate Communications Manager
P: 07540 063 598 or E: phoebe.burrows@christie.com