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21 August 2019 | Childcare Mortgages

Changes to children’s day nursery sector affecting bank funding

Changes we’re seeing to the underlying structure of the children’s day nursery sector are affecting the availability of bank funding.

A wave of private equity funding for larger sites and the rise of group operators in recent years has resulted in an increase in business valuations, and arguably an improvement in standards. Jassi Sunner, Senior Business Agent at Christie & Co provides an overview of where geographically these changes are being felt and where opportunities lie in his blog.

With an increasingly professionalised sector as well as a broader range of willing investors we’re now seeing growing confidence within the lending community to provide funding. Based on recent lender conversations, it’s our opinion that this trend will continue for the foreseeable future and could even perpetuate further price increases.

Due to the increased attention the sector is receiving, the competition for sites has increased accordingly. One word of caution here for would-be buyers; rising prices can take a while to filter through to valuers and lenders will usually employ a cautious approach to site valuations. This is particularly true of leasehold sites without the support of an underlying asset.

Leasehold rather than freehold sites tend to be more common than in most of the other core sectors we operate in. This is partly because of the prevalence of leasehold sites. However, we’re also engaging with operators actively seeking leasehold sites in the short term with an option to purchase the freehold at a later date, perhaps when there’s a little more political and economic certainty (they may be waiting a while). Jassi Sunner comments, “Historically, the value of the freehold in London has far outweighed the business aspect of a sale. We are now starting to see this is in other affluent parts of the country, as well as with purpose built commercial units. As a result, we find that operators are still looking to offload the whole package but would consider a sale and a lease of the premises over a 10-15-year period.”

Selecting a leasehold site does have implications for the type of funding available, such as how to demonstrate suitable security. Although, there are still options when security isn’t readily available – such as the Enterprise Finance Guarantee Scheme - which a broker can help to navigate on an operator’s behalf. Alternative solutions could include leveraging an existing freehold site or purchasing a plot of land with a view to building from scratch. Neither are particularly straightforward, either from an operational or funding perspective but could provide long term security both for the lender and the business owners.

As referenced at the beginning of this piece, bank appetite in the children’s day nursery sector has undoubtedly increased in recent months but funding solutions can still be relatively complex. Engaging a specialist broker such as Christie Finance with up to date market experience could enable successful operators to take advantage of the opportunities available.

To discuss how Christie Finance could support your expansion within the children’s day nursery sector please contact Ed Brown on 07734 553659 ed.brown@christiefinance.com or Nicola Oswell on 07701 313484 nicola.oswell@christiefinance.com