Special report: Property market predictions for 2025 EARLY YEARS

  • 23rd January 2025

In this special report experts from leading UK property consultants reveal their predictions for the EARLY YEARS real estate sector in 2025

October proved to be an unprecedented month for completions as owners looked to close deals before the Autumn Budget, including the sale of the Children 1st Day Nurseries portfolio of 24 settings to Storal. Image, Christie & Co

 

Larger operators look to grow their portfolios, leaseholds and sale-and-leaseback models gain traction, and private equity investors continue to favour the market

 

KIEREN COLE, partner in healthcare valuation and advisory at Knight Frank

The market remains largely fragmented, with around 70% of private day nurseries being operated by independents.

In recent years the early years sector has undergone considerable change and an influx of private equity interest has fuelled the growth of corporate groups, while operators have increasingly embraced leasehold tenure structures compared to traditional freehold ones.

Children from nine months of age also became entitled to 15 hours of free childcare from September, which adds to the existing 30 hours of free childcare for 3-4 year olds.

However, like other industries, day nurseries have recently had to factor in wage, energy, and business rate increases, which have mirrored the wider inflationary environment and have proportionally been much larger than the funding boost, with further rises on the horizon from recent National Insurance and minimum wage changes.

In recent years the early years sector has undergone considerable change and an influx of private equity interest has fuelled the growth of corporate groups, while operators have increasingly embraced leasehold tenure structures compared to traditional freehold ones

Consequently, we are aware that fees for non-funded hours at many nurseries have grown, as operators look to use that income to subsidise Government-funded places.

Consolidation in the early years sector has typically derived from single-site nurseries being bought by small or regional groups and smaller groups being acquired by large group operators.

Although expansion through mergers and acquisitions still dominate the market, in future we expect to see an influx in operators organically growing their portfolio, such as Kids Planet.

And we are seeing further changes to holding structures enabling this further consolidation, with more nursery groups adopting a predominantly-leasehold model.

A high proportion of the largest operators have undertaken some form of ground rent sale and leaseback in recent years, and we expect to see demand to undertake such transactions to continue.

The growing interest from private equity investors towards scalable industries has injected further investment into the early years sector.

Although expansion through mergers and acquisitions still dominate the market, in future we expect to see an influx in operators organically growing their portfolio

Research by The Guardian in 2023 revealed that 7.5% of all nursery places were fully, or partially, controlled by investment companies (up from 4% in 2018).

In future, we are likely to see smaller groups receiving private equity funding due to the potential for scalability, which is uncommon in other property sectors.

Although this investment is allowing operators to expand at speed, there have been some questions surrounding vulnerability of failure due to financial operating models and issues with debt, which could exacerbate issues in unequal geographical coverage.

The change in government sees the intention to retain previous changes to the Planning Use Classes Order, which could mean expansion potential to the market, thus properties being acquired for operating day nurseries without requiring planning permission.

There is also the news that Labour plans to create 100,000 additional nursery places across England through conversion of spare classrooms into spaces for nurseries, paid for by the removal of tax exemptions that private schools currently benefit from.

These plans have the potential to target areas where childcare is sparse.

 

NICK BROWN, director and head of brokerage for childcare and education at Christie & Co 

2024 was an active year for children’s day nursery transactions across the UK, with Christie & Co brokering 59% of deals across the country, according to data on daynurseries.co.uk.

The company also achieved a 36% increase in the number of offers received on day nurseries for sale.

The company also saw an increase in appetite from medium groups – this buyer category acquired 5% of all day nursery transactions in 2023, which rose to 19% in 2024.

Conversely, compared with the prior year, 2024 saw a decrease in appetite from smaller groups, single settings, and first-time buyers, with these buyers acquiring just 15% of assets in 2024 compared with 33% in 2023.

Buyers remained keen to acquire both leasehold and freehold opportunities, albeit there remains a lean towards leasehold sales, with 61% of day nurseries sold in 2024 being leasehold compared with 57% in 2023 and 59% in 2022. Where previously there was a notable concentration of buyers seeking settings in London and the South East, activity in 2024 stretched across all areas of the UK.

With regards to the size of settings purchased, corporate and large groups acquired smaller settings last year, with the average having 86 places compared with 92 places in 2023.

Buyers remained keen to acquire both leasehold and freehold opportunities, albeit there remains a lean towards leasehold sales, with 61% of day nurseries sold in 2024 being leasehold compared with 57% in 2023 and 59% in 2022

Smaller groups acquired larger settings, with the average changing from a 62-place nursery to a 67-place nursery, while there was little change in the settings acquired by independents and first-time buyers.

From an investment perspective, interest in the UK day nursery market in 2024 was fuelled not only by the extended early years entitlement and increased government-backed income in the sector, but also by a shift in investors focusing on social impact investment opportunities, ethical investing, and ESG considerations.

The past 12 months saw a notable increase in medium-sized groups making selective acquisitions to expand their regional footprints.

There was also no shortage in demand from investors and buyers seeking platform acquisitions and opportunities to consolidate via the acquisition of high-quality, larger capacity settings within the UK’s day nursery sector.

Ahead of the Autumn Budget, October proved to be an unprecedented month for completions at Christie & Co, as owners progressed sales processes endeavouring to close deals, which many did, ahead of the announced policy and tax changes. This led to a surge in business owners deciding to sell.

Christie & Co also notes an average increase of 7.7% in the price of day nurseries sold last year.

The quality of provision transacted in 2024 was notably stronger than 2023, with high volumes of investment-grade transactions completed.

There was also no shortage in demand from investors and buyers seeking platform acquisitions and opportunities to consolidate via the acquisition of high-quality, larger capacity settings within the UK’s day nursery sector

The average price of medium group portfolio sales increased by over 10%, while small-group single settings sales were flatter in pricing terms reflecting a tone in the order of 1% pricing increase.

While there may be some influence through the comparative premiums paid for portfolios, linked to the configuration, quality, and nature of assets, alongside the type of buyer and their desires to acquire multiple nurseries in a single transaction, single-asset settings remain in high demand and exceptional prices have continued to be achieved for those of high-quality in desirable locations.

In the day nursery market in 2025, Christie & Co expects:

  • Continued interest in platform acquisitions, expansion and growth opportunities from entrants, established and new
  • High demand for quality leasehold and freehold opportunities across the UK
  • Further consolidation from large and medium-sized groups seeking acquisition opportunities
  • Buyers will increasingly scrutinise parental demographics when considering acquisitions and undertaking due diligence
  • With the 2025-26 EYPP funding rates not factoring in NIC increases, some settings will face greater financial sustainability challenges

 

JENNIFER GILL, director in the leisure and trade team at Savills

Lots of investment opportunities with good-quality covenants came to the market at the end of 2024 in the day nursery sector, particularly those covenants which have improved over the last few years, as the various groups active in the sector have grown and established themselves as major operators or brands in the market.

However, to our knowledge, none of these opportunities have completed yet, and some have had limited interest.

The buyers which are looking, are generally opportunistic and predominantly new entrants to the sector looking to create value over the period of their hold, with many appearing to be sensitive to anything that may detract from a nursery asset being ‘prime’, especially if a property is deemed over rented.

With build costs still very high, and disproportionate to the gross development value for lots of settings, we foresee fewer standalone new developments starting this year, with most new-build facilities only happening as part of wider housing or local centre developments, usually as part of a planning application requirement

2024 was generally a cautious year for the investment market, and we’re of the opinion this will continue while wider economic forces affect investor decisions, the cost of debt remains high, and there is less competition in the market for acquisitions.

We expect to see continued demand and M&A activity in the day nursery sector in 2025, with some groups concentrating on acquisitions and others focusing solely on organic growth; the latter is likely especially among those nursery operators with very-strong brands and design requirements.

Nursery operators are set to benefit from the final round of local authority funding in September this year, which will continue to boost their occupancy rates and could instigate further consolidation of the market.

The buyers which are looking, are generally opportunistic and predominantly new entrants to the sector looking to create value over the period of their hold, with many appearing to be sensitive to anything that may detract from a nursery asset being ‘prime’, especially if a property is deemed over rented

However, staffing remains a significant operational problem and barrier to providing childcare and an increased number of childcare places in some locations.

With build costs still very high, and disproportionate to the gross development value for lots of settings, we foresee fewer standalone new developments starting this year, with most new-build facilities only happening as part of wider housing or local centre developments, usually as part of a planning application requirement.

But several nursery projects involving the conversion of appropriate redundant offices, pubs, or warehouses, started in 2024 and we expect to see more of these in 2025 as they allow developers to create value at lower build costs.

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