Education ‘a frontrunner’ in post-election property sector

  • 25th July 2024

Following the outcome of the General Election, we speak to Oliver Weir of Nexus Pine about the likely impact on the property sector

Oliver Weir

 

Following the General Election outcome, education property investors and operators will be watching closely to gauge the impact of the promised expansion in nursery school places.

In its manifesto, Labour pledged to create 100,000 additional childcare places and more than 3,000 new nurseries as part of a wide-reaching childcare plan.

And it said it would turn classrooms in existing primary schools into ‘school-based nurseries’ for an estimated cost of around £40,000 per classroom.

The money to pay for this was earmarked to come from a highly-controversial VAT levy on private schools.

While the source of funding may be up for further debate, the need for new nursery schools is not going away as Labour also committed to sticking to the former Government’s plans for an expansion of early years funded childcare, with working parents able to receive additional free childcare hours from April of this year.

The Department for Education (DfE) has previously said about 85,000 extra childminder and nursery places are needed in England for this expansion to work.

Labour has pledged to create 100,000 additional childcare places and more than 3,000 new nurseries as part of a wide-reaching childcare plan

An attractive market

Nexus Pine acquires and manages a portfolio of educational properties across the country. In recent years, the educational sector has seen increased interest in the nursery sector, which is expected to continue in light of the proposed early years funding extension.

Speaking to Education Property, Oliver Weir, investment associate at Nexus Pine, explains: “The COVID pandemic accelerated a number of trends in the property investment market.

“With the ongoing pressures in the retail and office sectors, there has been a rise in the demand for alternatives, and education has emerged as an attractive proposition given the income profile and fragmented nature of the market with the potential for consolidation.

“Education is viewed as being defensive in nature, in that it is supplying a required service. At its core, the sector offers investors an attractive blend of long-term, inflation-linked income, strong covenant strength, and relative stability.

“The education sector remains highly fragmented in terms of operators, with only a small number of large groups. In the nursery sector, Busy Bees and Bright Horizons have the greatest share of the national market, with Kids Planet making its mark in the North of England.”

Increasingly, nurseries located in new residential developments are being favoured

Operational resilience

But these operators cannot buy every building which comes up for grabs, so there has recently been a number of new operators, investors, and lenders entering the market, attracted by the strong cash flows that can be generated and the operational resilience.

Weir said: “As investors, we are working with a number of newer operators looking to expand their operations in the sector.

“When we are considering which operators to work with, we look to gain an understanding of their financial picture and how they are funded.

“Carrying out due diligence on potential sites for nursery businesses is key for investors.

And, according to Weir, there are several ‘selling points’.

He explains: “Location is fundamental when assessing a potential acquisition.

“We will look at a number of factors, including the local demographic, nearby demand, and the value of residential properties around the site. We will also look at what competition there is in that locale.”

The condition of buildings also plays a major part in decision making.

Weir said: “We consider all types of buildings, but remain wary of potential issues including asbestos, high alumina cement, or the highly-topical reinforced autoclaved aerated concrete (RAAC) in the older stock.

“But what we have seen as an emerging trend is nurseries situated in new-build residential developments where developers are required to deliver commercial space as part of the scheme.

“That works particularly well for nurseries as they are handed the property in shell condition ready for their bespoke fit out, allowing them to complete the works and begin trading in a relatively short time frame.

“We have a couple of nurseries in new-build residential schemes and they are great settings. Often the core market for these nurseries comes from the buyers of the flats, who might be people with young families or those looking to start a family.”

The sustainability agenda is also driving property investment

Energy efficiency

The sustainability agenda is another consideration for property investment.

Weir said: “Minimum Energy Efficiency Standards require buildings to have an EPC rating of ‘E’ or better in order to be let. If this minimum rating is not met, works must be undertaken to bring the building up to standard and this is becoming an increasingly important consideration for investors.

“The previous Government proposed, and then scrapped, plans to raise this threshold to a ‘C’. It is likely the new Government will explore reviving these proposals so when we are buying buildings we look to be forward thinking and think about futureproofing.”

Other deciding factors when choosing properties to invest in are parking provision and outdoor space.

Weir said: “In London parking can be less of an issue as parents may drop off and commute on public transport. But, outside of London and other major cities, parents want parking for drop-off and pick-up.

“And, when looking at outdoor space, size is important as you want a space commensurate with the number of children.

“We have seen nursery operators spend a lot of money and effort in making their outdoor spaces as attractive as possible and, speaking to operators, they are very proud of these spaces and look to fully utilise them.”

Long leases

The long leases afforded on educational properties is driving increased interest in the market.

Typically, these are let of 25 years, but investors will be looking for the longest lease periods. They will then make sure the rent is affordable for the area and the operator.

“There are a number of operators with ambitious expansion plans and robust financial backing, but there is a limited amount of quality stock available to them,” said Weir.

“Often when a suitable building comes available to lease, there is strong competition between operators wishing to secure it, which is a good signal for investors as to the future demand for their building.

“However, and as in all cases of a supply/demand imbalance, this can put upward pressure on rents. Both investors and operators must be wary of the property being overrented.

“This can be exacerbated if the property is elected for VAT. As nurseries are VAT exempt, the operators cannot claim this additional 20% back. Therefore, it is important to ensure that the rent is sense checked to ensure it is affordable.

“If we are acquiring a setting with an established trading history, we generally look for EBITDAR cover of 1.8-2x as a measure of this.

“But, as investors, if we do our due diligence effectively we can ensure the properties work for the operator and for us.

“Operators undertake thorough due diligence themselves before making a decision on a building, and then spend significant money fitting out, so we take a lot of confidence from that.

“And, if the operator doesn’t stick around, we are confident that another will step in.”

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