The evolution of tenure structures

  • 26th June 2024

Jenny Nicol, associate director at Savills, explores how tenure structures have evolved in recent years in the children’s day nursery market

Jenny Nicol

There has been a notable transformation in the ownership and structure of children’s day nurseries.

The industry is shifting from small, single-site, independent operators to institutionalised organisations that are increasingly attracting investment.

And, while the market remains fragmented, groups continue to grow organically and through consolidation by embracing leasehold tenure structures.

Ten years ago, leasehold day nurseries were rare, reserved for the few, often reflecting ‘pack away’ pre-schools operating within a church hall, or just for the very-large ‘super group’ operators.

But the market has evolved, so much so that it is no longer polarised reflecting extremes, but for the masses at all levels of the market.

A modern lease for a day nursery is typically 20-30 years, with five-yearly capped and collared index-linked reviews, and with security of tenure.

These leases provide landlords with longer-term income, regular predictable reviews, and a highly-regulated tenant, receiving Government-backed income and operating within an industry where there is strong demand and the opportunity to secure a client with a long lifecycle of up to five years.

For operators, leaseholds enable nurseries to grow at speed.

The industry is shifting from small, single-site, independent operators to institutionalised organisations that are increasingly attracting investment

Groups can meet immediate demand quickly and more easily ‘plug gaps’ within their estates without having the burden and liability of a freehold property.

And changes in the planning system have permitted entrance into established commercial leasehold markets, such as retail and offices.

The opportunity to occupy this alternative property supply has meant no choice but to embrace leasehold terms.

This has also benefitted landlords, as while leases for buildings formerly classified just for A1 or B1 use in planning terms have shortened and are structured to include incentives such as tenant breaks, and rent reviews in line with the market, day nurseries negotiate their position.

This usually provides landlords with a more-secure, less-volatile, longer-term income stream.

Securing property in affluent locations, such as London and the South East, on a freehold basis often means high property values and competing with developers who structure bids based on the end use.

Acquiring or taking a leasehold interest instead can leave a bigger budget for other business drivers such as the fit-out, interiors, equipment, and branding.

Having strong branding allows for repeat business models and the opportunity for clients to identify with recognisable values, supporting marketing as competition increases.

Increased budget  also allows for investment in staff through developing training academies, head office facilities, and central management teams, and social benefits such as mental health initiatives and community projects.

We have seen such a growth in leaseholds that they are now often the preferred holding structure for many group operators to enable growth.

Leaseholds enable nurseries to grow at speed

And demand is such that multipliers achieved for operating leasehold businesses are closing the gap on those realised for freehold operating concerns.

However, despite this winning formula, there remain challenges.

Funding is not as readily available to leasehold businesses within the nursery sector as it is for alternative markets like pharmacies and dental practices.

The lack of financial products and investment for those without a balanced portfolio can result in unfavourable terms being offered, or puts a stop to growth aspirations.

However, this has paved the way for private equity interest and alternative options such as working closely with an investor which would purchase the real estate and hold the investment.

Leaseholds are also a depreciating asset where there remains the possibility for landlords to take back the property for their own occupation or redevelopment at the end of the term.

The Government’s expansion of increased funding for early years continues to fuel demand for nursery places.

And, while this remains, there will continue to be demand for new nursery settings – and often the quickest way to facilitate growth is through leases.

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