Half year review of the Childcare & Education market

Specialist business property adviser Christie & Co provides an overview of the UK Childcare & Education market in the first half of 2018, reflecting on previous expectations, emerging trends, and challenges facing the sector. 

During the first six months of 2018, the Childcare and Education team have witnessed unprecedented levels of activity resulting in a record-breaking number of nursery businesses sold. Alongside this there has been an increase in the number of businesses that are currently preparing for sale, with those sale processes scheduled to commence during Summer 2018. Seeing the premium prices that are being achieved, it appears that business owners in the sector believe now is the right time to sell. 

For portfolios, these premiums are reflective of significant arbitrage between prices of single assets acquired by groups, historically in isolation, and the price premium achieved for the sale of the portfolio, driven by demand and increased competition from eager, well funded purchasers. Portfolios have continued to attract multiple offers and high multiples, and we expect the high levels of activity and premium pricing associated to Q3, and potentially Q4 2018 sales, will continue to be achieved.

Demand for independent education settings has continued, particularly for quality, renowned independent schools across the UK, especially in the South East. The pool of eager, and financially vetted buyers seen at Christie & Co has risen during the first six months of 2018 with demand for ‘trophy assets’ remaining incredibly high, as is demand for market leading portfolios. 

During the first half of the year the Christie & Co team have been approached by a number of potential buyers, principally investors and trade operators, from across the globe to assist with international expansion plans and we have been awarded acquisition mandates from a number of companies on the back of recent deals fuelling demand across the international schools market. The most pressing challenge for buyers continues to be lack of supply, but for those schools that are presented to the market in confidential sale processes, premiums have continued to be achieved. 

Beyond the end of this year it is difficult to predict what the 2019 landscape will look like, especially against the backdrop of Brexit which will undoubtedly create some caution, nervousness and potential uncertainty across all markets. The impact of Brexit could cause a degree of economic uncertainty, affecting increases associated to perceptions of risk by banks, investors and buyers alike, all of which would have a bearing on the markets, but to what extent is difficult to quantify. 

Looking ahead to the second half of 2018, against a backdrop of incredibly high multiples being achieved via Christie & Co’s sale processes, we fully expect high levels of activity to continue. 

Predictions
As part of Christie & Co’s Business Outlook 2018, published at the beginning of this year, the team shared their market predictions for the year in the sector. Now reflecting on those forecasts at the half year period, some of the predications are continuing as expected.

Anticipating increased M&A activity across UK, Europe, Asia, and specifically China, Christie & Co has indeed seen transactional fee earnings significantly increase this year, fuelled by increases in merger, acquisition and sales activity for both single asset settings and portfolios. Further evidence of growing activity, at the global half year earnings review, the Childcare & Education team saw invoicing up by some 335% compared to 2017, with 2018 looking to be a record breaking year for nursery transactions and for those owners that have been capitalising on the premium prices achieved. 

While investments have been booming, an expected increase in UK closures in some localities due to sustainability challenges was noted, which has been the case going into 2018. While the 30 hours free childcare policy and its impact on fees is frequently cited as the primary reason for closures, administrative, regulatory and increased operational challenges have also contributed. Demand for settings for medium to larger businesses has remained high, with transactional activity continuing also as expected.

In the specialist childcare sector, there is continued pressure on fee levels, with large disparities between different UK regions and providers, and staff cost pressures due to the national living wage increases, pensions and sleep rates, which will continue to have an impact on smaller, less prepared providers. 

Key transactions
In a busy start to the year, Christie & Co has handled some significant deals across the UK, most notably the sales of: Yellow Dot, a group of 12 nurseries across Hampshire to large US-based group operator Bright Horizons Family Solutions, Mace Montessori Nursery Schools, a portfolio of nine UK nurseries and a school around Central London to leading provider Busy Bees, and Abbeywood Tots, a collection of five day care settings in Bristol to expanding group Just Childcare. 

Christie & Co will release its 2019 Business Outlook, presenting an annual overview and year ahead forecast of all of its sectors including Childcare & Education, in January 2019.