Property

Cashing in

Is the property market a viable one for schools? Morgan Allen shows how to maximise the potential of your property assets to provide best-in-class facilities

The cost of an independent education continues to be a much-debated topic for parents and schools alike. Schools inevitably are looking at different ways to ensure they keep their fees low and maintain their competitive edge with best in class facilities. Some schools have already suffered falling rolls and have had to look at a radical change in their operations or face closure, while others have sought to merge with other schools.

Many assume that the consequence of this change, where a disposal of surplus school building is contemplated, is that it will lie empty and redundant in the current climate with little interest from the wider market. In the boom years, redundant sites were snapped up by housebuilders for redevelopment, but now that developers have retreated out of the market as a result of banks’ more restrictive lending criteria and a sluggish housing market, it has provided an opportunity for different sectors. Interestingly, the highest level of demand for these sites is, somewhat surprisingly, from the educational sector.

A school of thought
A variety of educational organisations are actively seeking new sites for uses, such as language colleges, faith schools, special needs schools and international schools, thus allowing former school buildings to see a new lease of life and flourish. There are those existing organisations that look to expand their school model and also equity-backed organisations that continue to expand in this sector.

In considering this new demand further, during the buoyant property market of 2006 and 2007, educational purchasers could rarely compete with mainstream developers for sites, as the underlying value of property was almost always higher as a development site. Whereas previously, developers would acquire sites with minimal equity input and a bank keen to do business, now those few banks who will lend (Barclays, RBS, Santander etc) are working to much-tightened lending criteria. In addition, the risk profile associated with developing sites has gone up exponentially and developers are reluctant to purchase speculatively. The net result is that educational purchasers are now able to compete for sites and are using the current economic situation as an opportunity to acquire new buildings or to expand their existing premises.

However, access to funding continues to present difficulties for educational purchasers and developers alike, unless they can present to banks a robust business case for expansion, merging or setting up new schools. Without this in place, a large number of schools will simply be window-shopping for new sites and buildings, rather than committing capital expenditure and investment to them. Furthermore, the ongoing demand for the school’s services will inevitably be affected if unemployment continues to rise during 2010.

The way forward
As schools are now under pressure to provide best-in-class facilities, selling off surplus assets releases the funds to do that and makes their building assets work for them. Schools are not trading land, but are optimising the value of their assets; obviously, some of them have held their properties for hundreds of years and these decisions are not taken lightly. However, where their building has come to the end of its useful life, the school can’t be seen to be sitting on its asset: it needs to do something.

One school from the home counties was aware that its facilities could not compete with other leading schools without major capital expenditure in new facilities. Having costed up the sums involved for new facilities, it was clearly an unviable option, so it proceeded to merge with another well-established school. The proceeds from the sale of its old school buildings to a residential developer were invested in brand new state-of-the-art facilities. Another school, in south-east England, sought planning permission for 22 houses on an old school boarding house and ancillary workshop buildings, which is now on the market with a guide price of £1.75 million.

It is evident that some independent schools are struggling in the economic environment, but they are not on their own. The state school sector is facing challenges, with the LSC withdrawing from many projects they had previously committed to, and the majority of the school sector is having to come up with a new strategy.

What is apparent is that every case needs to be treated on its own and there is no quick-fix solution that will please all involved. Extracting value from your property assets is not an easy or quick task, but it largely depends on the condition and location of the school building and ensuring that up-to-date and professional advice is obtained at every step and as early on as possible in the process. The good news is that there is inevitably always a solution.

Morgan Allen is a surveyor in Knight Frank’s Institutional Consultancy Department. Morgan can be contacted on morgan.allen@knightfrank.com or 020 7861 5426.

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