There’s 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. 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. The market has evolved, it’s no longer reflecting polarised extremes, as such leases are now for the masses at all levels of the market.
A modern lease for a day nursery is typically 20 to 30 years, with five-yearly capped and collared index linked reviews – as well as security of tenure. Leases provide landlords with longer-term income, regular predictable reviews and a highly regulated tenant. They also receive government-backed income, operating within an industry where there is strong demand – and the opportunity to secure a client with a long life cycle of up to five years.
For operators, leaseholds enable nurseries to grow at speed. Groups can meet immediate demand quickly and more easily ‘plug gaps’ within their estates without having the burden and liability of a freehold property. 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 there’s been no choice but to embrace leasehold terms. This has also benefitted landlords, as leases for buildings formerly classified just for A1 or B1 use (in planning terms) have shortened and are structured to include incentives. These include tenant breaks and rent reviews in line with the market, leading to day nurseries negotiating 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 ramps up. Increased budget also allows for investment in staff through developing training academies, head office facilities and central management teams – as well as 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. 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 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 who 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 industry reports nursery providers who cannot withstand the high operational costs, such as preschools have been forced to close. Albeit, the former conservative government’s expansion of increased funding for early years continues to fuel parental demand for nursery places. While this remains, there will continue to be demand for new nursery settings – and often the quickest way to facilitate growth is through leases.