Jo Makosinski explores why property valuations are vital for education providers

The valuation of a building or wider estate stands at the heart of all property decision making.

And this is no different in the education sector.

Whether a school is looking to add a new building to its estate; provide financial data for accounting purposes; give information to support a bid for additional capital; or sell off an existing asset – an accurate valuation is the starting point.

Initially, the valuer will ask what they are valuing and the purpose of the valuation.

They may need to value the whole school, surplus property, or only the playing fields.

Accounting for assets

Andrew Bowyer, a partner at Carter Jonas who has been dealing with education property valuations for 30 years, explains: “Valuations are an important part of my job and are required to account for an education provider’s assets in their financial returns.

“Academy trusts and universities, which are using public money, are accountable for that spending and need to show that they have a got a valuable asset or assets.

“For academy trusts, which can operate two, three, or more schools, we generally provide valuations when they take on a new school or have a new building constructed for them.

“In contrast, for independent and private schools, we usually provide valuations when they are looking to raise finance or if they want to dispose of an asset within their property portfolio.”

Carlie Edgerton, associate for lease advisory/valuation at SHW, adds:

“If a school is owner occupied, periodic valuations may be required for secured lending (mortgage) or accounting purposes and a landlord letting a property to a nursery may need a valuation for its Self Invested Pension Portfolio (SIPP).

“For any tenant renting a property, it is important to have a rental valuation carried out ahead of any rent review or lease renewal negotiation. This allows them to be aware of market rents and financially be prepared for any increase in rental payments that may be required.

“The majority of education valuations we carry out are for mergers, off-market sales, or rental transactions.”

Disposals have become more commonplace in recent years, and are expected to increase as the market responds to the Government’s decision to remove the VAT exemption on private school fees from 1 January next year.

“We have been approached by a number of schools around the UK to value their sites on the basis that annual pupils intake numbers are low, or predicted to be very low, following the VAT change,” said Bowyer.

Rise and fall

“Inevitably some schools will fall as a result of this and we already know of a couple of private schools which are having to close, so they are looking to identify what their value is in the market, and not necessarily as a school.

“While the local authority will generally want to secure education sites for education use, there is the possibility of selling assets for other uses if the school can demonstrate there is a lack of demand.

“Some private schools, for example, are set in lovely country mansion houses and estates and these are popular among residential developers.

“In this case the valuation is crucial. The developer will want to know the building has been well maintained and is physically sound and in a good location.

“The valuer will look at everything from the physical buildings and amenity assets to playing fields and landscaping.”

Valuations are also sought by education providers if they are leasing property as they are used to underpin rent reviews.

But there are challenges facing education valuers, namely a lack of open market evidence and a shortage of transactions.

Edgerton explains: “Far fewer educational properties change hands, or have lease events, than any other type of property, so there is less evidence generated and there are even fewer people in the market who know who to speak to or where to find the evidence as often transactions can be confidential or dealt with directly between landlord and tenant with no surveyor involved.

Meeting the challenge

“Additionally, often when schools are sold on the open market, it is because they are no longer fit for purpose or there is no demand for them. This means they are sold for alternative uses, but this information may not be forthcoming which can skew the evidence.

“A less-considered challenge is the measurement of school buildings. There can be issues around accuracy of historic records or challenges of gaining access to measure and safeguarding issues during term time.”

SHW has also seen specific challenges with properties in the South East of England.

Edgerton said: “Many schools that we deal with there are unique.

“We have dealt with Grade I-listed schools, schools with boarding houses and onsite teacher accommodation, schools with both Grade II-listed and new purpose-built blocks, and schools in converted houses.

“Each of these building types has its own challenges and constraints so have to be considered carefully on a case-by-case basis.”

Types of valuation

According to the Royal Institution of Chartered Surveyors (RICS), there are several approaches for valuing a school according to individual circumstances.

• Comparative method (market approach): Evidence of freehold and leasehold transactions of other schools and similar properties is analysed, adjusted, and applied to the subject property, usually on a per-square-metre basis. Adjustments would be made to reflect location, size, condition, any legal or planning restrictions, and facilities such as sports pitches.
• Profits method (income approach): The valuer’s job is to assess the fair maintainable trade expected from the subject property, as a fully-equipped trading entity operated by a reasonably-efficient operator that is assumed to have a profit motive. The valuer then applies a capitalisation yield to their assessment of Fair Maintainable Operating Profit (FMOP), which is informed by market transactions. As with all properties valued on an income approach, knowledge of the trading performance of other schools which have been transacted is important when undertaking analysis of the year’s purchase (YP) multiple. It is helpful to be involved in the market transactions, or have agency colleagues who are, in order to value trading schools
• Depreciated replacement cost (DRC), or cost approach: This is more commonly used for state schools, but may occasionally be adopted in financial reporting for a few independents, if the valuer considers that the property is of a scale or nature which has rarely, if ever, been traded in the open market. The approach is based on the current cost of building a modern equivalent replacement school, including acquiring a suitable site, less deductions for physical deterioration and all relevant forms of obsolescence and optimisation
• Residual method: Vacant school assets may be assessed having regard to market demand and pricing for a continuation of their existing use, as well as the so-called hope value for any higher-value alternative use or redevelopment potential. The valuer assesses the gross development value for a realistic redevelopment scheme and deducts development, finance, and sale costs and an appropriate developer’s profit. The residual land value is then adjusted for planning and other risks
• Reinstatement cost assessment (cost approach): It is a common misconception that the cost of rebuilding the school premises, which is used for insurance purposes, is similar to its market value. It is not, and the two figures are rarely close

Recent education valuations undertaken by Carter Jonas include advising the Haberdashers’ Company on its Grade II-listed former boarding houses, educational, and administrative buildings at one of its sites in the West Midlands.

Working alongside the company’s specialists in Oxford, the Birmingham valuations team was able to combine regional sector knowledge with accumulated years onsite to provide joined-up advice for the client.

Savills, which is also active in the education valuations market, was recently instructed to value a state-of-the-art sixth form college in Ipswich which boasts a range of educational and vocational learning spaces, including mechanics workshop, hairdressing studio, and recording studios.

And SHW has spent five years advising one landlord on the future of a site.

Edgerton said: “The landlord first approached me during early discussions to sell the building to the tenant and I provided valuation figures for a range of scenarios, including the existing use value, vacant possession value, and investment value subject to a new lease.

“I then provided support in the background as negotiations continued and options were explored.

Covering all bases

“My final report was a valuation report to send to the Charity Commission to support the terms of the final transaction.

“Another of our interesting instructions has been to provide valuation advice for the relocation of a nursery from a site that was arranged across multiple levels and no longer fit for purpose to a newer, single-storey building.

“To decide whether this was a viable option, our client needed to know the value of its current site versus the proposed site.

“We looked at the value of the current site in continuing education use and also the likelihood of planning consent being granted for an alternative use.

“The configuration of the site lent itself to residential conversion, so discussions were had with our planning department in order to consider what a realistic scheme might look like.

“We also liaised with our development consultancy department to check the appetite of local developers to see whether this option should be pursued further.

“By providing both values, our client was able to make an informed decision about the purchase price of the new building.”

Bowyer adds: “Specialising in education valuations is quite a niche part of the sector. You need to have experience in selling schools and be aware of what has happened in the past and have an understanding of how the sector works and is evolving to give confidence in the valuation.”

Maintenance obligations

And Edgerton advises ensuring all planned maintenance of buildings is kept up to date in order to maximise value.

She said: “Education buildings can be expensive to keep in repair and require continuous upkeep and poor repair will have an impact on the market rent and market value of the property.

“If there is a lease in place, get a measured survey and keep it on record for future purposes.

“It is worth incurring the expense once in order to avoid protracted negotiations over floor areas every five years at a rent review or at every lease renewal.

“And for any transaction or requirement, start engaging with your advisors as soon as possible.

“Many organisations wait until the summer holidays to start looking to agree a fee, scope of works, and get a report done, but by that time many specialist surveyors can be booked up which can result in delays and the work needing to wait until October half term.”