Day nursery market insight: Scotland

Senior director at Christie & Co, Martin Daw, shares his insight into the day nursery market in Scotland.

Scottish day nursery market: overview

We had a strong start to 2023 with the announcement of the sale of Kingsmeadows Nursery, a well-established and highly regarded 93-place purpose-built children’s day nursery in Peebles. The business was purchased by Bright Stars which took the group to 87 settings in the UK, 16 of which are in Scotland. Since then, we have seen continued appetite from existing operators and corporate bidders for management-run nurseries with a high capacity for registered spaces, strong Care Inspectorate grades, and robust trading accounts, resulting in high multiples being achieved on both leasehold and freehold sales.

Additionally, there has been a large influx of new buyers looking to enter the sector with budgets and experience more suited to smaller, single settings to provide a platform for a softer entrance into the childcare sector. This has created competitive bidding tension and elevated values to where we see in other prime areas of the UK.

Challenges in the Scottish market

The market continues to be strong despite the current political and economic backdrop which has created uncertainty, impacting buyers’ ability to achieve optimal lending with interest rate rises and a reduced pool of trading lenders.

The Scottish childcare market has also been significantly impacted by current operational inflationary challenges. Despite increased costs, day nursery owners have been able to offset most of this by raising fees – with some as high as 12% – and benefiting from stronger occupancy rates as a result of the partnership funding. Workforce and recruitment challenges also remain, with more and more staff seeing the attraction of Local Authority, retail, and hospitality pay conditions.

Another factor that has impacted the stock on the market is the Care Inspectorate’s changes to the quality criteria in inspections, which has resulted in a trend of downward quality grades across Scotland. This has led to increased competition for quality assets, especially given the acquisition trail from large groups such as Bright Stars (formerly ICP Education), which has resulted in competitive pricing and multiples of EBITDA eclipsing previous values.

Scottish day nursery market: What to expect in the second half of this year

Despite the challenging backdrop in 2023, we expect to see positive market movements with the same continued and competitive demand from corporate operators and a resurgence of new entrants to the sector.

The Scottish Budget posted at the end of 2022 provided plenty of opportunities for current operators and new investors alike to profit in the Scottish ELC markets as opposed to our Southern counterparts. Day Nursery Relief, which was due to end on 30 June 2023, has been extended indefinitely, providing certainty and support for the sector. On average, Scotland’s funded hourly fee rate remains higher than England’s by approximately +£0.30 per hour, providing more income for funded spaces across the year.

Operators in Scotland are further anticipating additional funding for all age groups to be announced come the end of the year, when the SNP releases the Scottish Budget in December to tie into the same efforts made by The UK government which will be rolled with a staggered approach from April 2024 completing in September 2025 to include funding for all age groups under five-years-old. Positive confirmation of this would likely drive interest in current operators, as well as those expanding or entering the market ahead of this when net profits will likely be driven upwards from the additional funding granted leading to higher market values.

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