The day nursery sector, somewhat appropriately, is in its infancy. Compared with its bedfellows in the healthcare sector – notably care homes – it has few big chains, little institutional investment and is undervalued with low multiples.
But that could soon change. Not only is there a lot of institutional money looking for a home, but this little toddler is starting to grow up.
Research by Laing and Buisson shows that the children’s nurseries market in the UK was worth £4.6bn in 2012-13. And research by Key Note shows that its value rose by 16.1% from 2007 to 2012.
In essence, it remains a cottage industry, however. In the UK there are some 325 nursery groups, which Laing and Buisson defines as entities operating three or more nurseries. And although their share of the market is increasing, those groups accounted for just 22.7% of capacity last year.
Less than 5% of the sector is corporately owned. The top 40 providers in the UK together command just 12%
of the market. Most hold less than 0.1% and have just one or two premises. The largest operator, Busy Bees, has 200 nurseries yet has just 2.8% of the market share.
But it seems that the time is ripe for growth and consolidation.
“The nursery market remains highly fragmented,” says JLL’s Barry Nickelson, a director in the healthcare and education valuation advisory team.
“That indicates potential capacity for future consolidation,” he adds.
However, consolidation has been described as imminent for some time now, along with institutionalisation and investment.
“Nursery occupancy is up,” says Vikki Thomas of Colliers International’s healthcare team, “and expansion is on the cards for many operators.”
The main reason for this is commitment by the government to subsidise nursery places for ever-younger children (see FEET gets a leg up, right).
“That is the main driver for expansion, as operators rush to provide more space for two-year-olds,” says Thomas.
It is because of this, Thomas says, that despite the slow but steady growth, many operators are looking to expand, with some more than doubling their businesses.
“Expansion is evident by the number of businesses that are refinancing to fund extensions or purchasing new facilities,” she says.
In a market such as this, growth tends to come from operators identifying new sites, not from buying existing groups.
“What we are seeing is that there is more activity. More people are refinancing, more people are expanding,” says Knight Frank healthcare partner Kieran Cole. “They are looking at buying a second nursery or extending an existing premises.”
Interestingly, there is more money being spent on the quality of the nurseries. “People are seeing that there is an advantage to capital values.”
This has led to the multiples inching higher. A year ago the multiples were sixes; now they are sevens. But there is still a long way to go before nurseries join top-end healthcare with 10-plus.
“In terms of instructions we are getting,” Cole says, “we have probably experienced a 20% uplift in requests for valuations, which is back to pre-recession levels if not exceeding them.”
But it appears that there are groups looking to enter the sector. The Co-operative, for instance, is looking at opportunities in the Home Counties, while YMCA is acquiring units to convert.
“There were a few deals last year but not this year, despite the money being out there,” says Cole. “That doesn’t mean it won’t happen. I feel it will happen.”
Nurseries are also benefiting from the demographic shifts that have favoured care homes. “The past decade has seen a relentless rise in birth rate, reaching its peak in 2012 at 729,674,” says Nickelson. By 2020, according to JLL’s statistics, there will be 4.8m children in primary school, 18% higher than in 2012.
This, unsurprisingly, has contributed to the nursery sector’s turnover, which last year exceeded £3bn.
“There is also a trend for women to have children at an age when their tendency to use childcare is at its highest,” says Nickelson. Indeed, the proportion of women giving birth over the age of 35 is now triple that of the early 1980s. This, JLL believes, is helping to fuel a forecast 8% increase in nursery and primary schoolchildren between 2012 and 2015, which could create the perfect conditions to woo the investors.
“The care home industry, previously viewed favourably only by the savvy investor, now has a well-established investment sector,” Nickelson points out. He believes the same will happen with the nursery sector.
There are good reasons why some might disagree. The lot sizes are invariably small, and those larger players – Busy Bees and Bright Horizons – have already been snapped up. And, not only do investors have to factor in the property fundamentals, the location and the level of competition but they must also assess the operational business within each property. Given that each business is relatively small, this may seem a lot of work.
“There is also no corporate, blue-chip covenant,” says Cole. “There is no big name like Bupa on the hook.”
But Cole believes that it is the destiny of the sector to become a target for institutional investment. “It hasn’t got the complexity yet, although maybe going forward you will see more opportunities.”
Nickelson argues that there is “no reason why good-quality day nurseries should not follow a similar path to the care home market”.
Indeed, there are signs that this might be happening. “Investors hungry for ‘alternative investment’ asset classes are increasingly viewing the nursery sector with interest,” he says.
Add to that a lot of money that is looking for a home. Private equity is sitting on $1.14trn of “dry powder”. In truth, it has more money than it can spend.
“Maybe we should take this opportunity to them,” says Cole. “Maybe something to do with sale and leasebacks?”
There is, of course, the Pine Fund,
which already specialises in sale and leasebacks for nurseries. But, after eight years, it is still seeking great investments for its £50m allocation and is keen to expand.
According to JLL, recent corporate sale and leasebacks have transacted off yields of circa 6.5% to 7.5% depending on the quality of the covenant. “This has limited institutional investment to date,” says Nickelson.
The nature of the nurseries is changing. More operators are building larger, purpose-built nurseries. The converted family home or church is slowly giving way to establishments that are “fit for the future”.
“Their willingness to sign up to 25-year index-linked leases means the sector is increasingly viewed with interest,” Nickelson says.
With a shift towards investment-grade establishments and a steady wave of consolidation, more investors are looking at the sector. “Nursery discussions will increasingly be brought into the investor boardroom,” says Nickelson. “I strongly believe, as witnessed in the care home and primary care market, that this niche sector will become more mainstream.”
The big question is: when?
FEET gets a leg up
One factor that could help the nursery sector towards maturity is the government’s commitment to subsidise nursery places for ever-younger children.
The government spends some £7bn a year on pre-school support, much of which is in subsidies. And it is growing.
Latest initiatives include free early education for two-year-olds, a policy that revels in the appropriately cutesy acronym of FEET.
The introduction of FEET has already started to have a positive impact. The funding, however, is restricted to a small number of children, namely those from families on low incomes and those with certain special needs. But the potential is enormous. The subsidy, which came into effect in September 2014, will help fund part-time places for up to 40% of two-year-olds. “As a result, the potential for private day nurseries to increase their occupancy is very positive,” says Vikki Thomas of Colliers International’s healthcare team.
In its report into the nursery sector Laing and Buisson estimated that FEET alone had the potential to increase demand for nursery spaces by 10 to 15%. That equates to an additional 90,000 two-year-olds.
Others are more sceptical. “These initiatives are good news, but they don’t really translate into real change,” says Knight Frank healthcare partner Kieran Cole. “It hasn’t changed occupancy, it hasn’t changed fees. It is mostly a political thing – a vote winner.”
As Cole points out: “It’s a general election next year. I wouldn’t be surprised if you saw some big promises.”
An appetite for investors
Several recent key mergers and acquisitions have highlighted a market that is warming to consolidation.
In 2012 Busy Bees bought the Early Years chain, while Bright Horizons, which is listed on the New York Stock Exchange, bought Casterbridge. A year later Bright Horizons snapped up Kids Unlimited.
The biggest shift in the market was in 2013 when the Ontario Teachers’ Pension Plan, a Canadian private equity fund, bought Busy Bees for close to £220m. Its intention is to expand the brand internationally.
“That acquisition highlighted the soaring value of the childcare sector,” says JLL’s Barry Nickelson.
