Are commercial retrofits the building blocks for the future of the nursery sector?

In the commercial property market, the nursery sector has seen growth due to a rising demand for high-quality childcare, and a simultaneous move towards a focus on sustainability using commercial retrofits.

Government initiatives

In the 2023 Spring Budget, the Chancellor announced that working parents in England would be able to access free childcare.^[1] Eligible working parents of 2-year-olds can currently get 15 hours of childcare, and if their child is between 3 and 4 years old they can access 30 hours. From September 2024, 15 hours of childcare support will be extended to parents with a child from 9 months old and then from September 2025, support will reach 30 hours for those with a child from 9 months old up to school age.^[2]

This is a positive change for parents but in the absence of consultation with day nurseries and other childcare providers, there are concerns around the ability for capacity to be created and for the increased capacity to be staffed. Following the announcement there was a rise in demand from residential childcare providers seeking additional properties.^[3]

The Conservative government’s increased funding for early years will continue to fuel demand for new nursery settings.^[4] Labour have committed to sticking to the previous government’s childcare expansion plans.^[5]

Structural advantages

There’s been a significant transformation in the ownership and structure of nurseries from small, single site independent operators to institutionalised organisations that attract increasing investment. These groups continue to grow organically and through consolidation, by embracing leasehold tenure structures. In an industry showing strong demand and clients with a long lifecycle of up to five years, leases provide landlords with longer-term income, regular predictable reviews, and a highly regulated tenant that’s receiving government-backed income.^[6]

Supporting sustainability

Commercial retrofitting involves making necessary improvements and upgrades to existing buildings to enhance their energy efficiency and overall sustainability.^[7] There’s an opportunity for the nursery sector to use commercial retrofitting to support sustainable growth. As high-occupancy facilities, nurseries can benefit from energy-efficient upgrades and by having sustainable nursery buildings, it also aligns with the values of parents and communities who are increasingly concerned about environmental stewardship. Retrofitting nurseries not only reduces operational costs but also enhances the marketability of the facilities.^[8]

Future outlook

The expansion of the nursery sector has been driven by government initiatives, parents are looking for high-quality childcare and focusing more on sustainability. Nurseries that invest in energy efficiency through commercial retrofitting could see long-term success as they improve their facilities while supporting the environment.

Marc Callaghan, Head of Specialist Lending, InterBay said: “With the changes around government-funded childcare hours, we are seeing an increase in enquiries for expansion within this sector. Owner occupiers seem to be choosing to extend their current premises to accommodate the increase in demand, while investors are looking to purchase additional assets for let, to cope with the growing demand for affordable childcare within the UK.

Also, with the squeeze applied by high street banks and how they calculate affordability and debt service, specialist lenders are capitalising on opportunities to provide solid SMEs with interest-only loans. These are often for a longer term and at higher LTV’s, which offers them breathing space on mortgage repayments where costs have been rising due to economic conditions.”

^[1] Spring Budget 2023 factsheet – Labour Market Measures - GOV.UK (www.gov.uk)

^[2] Free childcare: How we are tackling the cost of childcare – The Education Hub (blog.gov.uk)

^[3] Business Outlook 2024 | Christie & Co

^[4] Savills Blog | The evolution of tenure structures within the Children’s Day Nursery market

^[5] Labour pledges 100,000 new childcare places - BBC News

^[6] Savills Blog | The evolution of tenure structures within the Children’s Day Nursery market

^[7] What a retrofit-first approach offers the UK | Journals | RICS

^[8] Christie & Co reviews day nursery market in latest Business Outlook report | Christie & Co