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Sector profile: Children’s Day Nurseries
Read time: 7 mins Added date: 01/04/2025
Jennifer Gill and Jenny Nicol of real estate services company Savills consider the key trends, challenges and opportunities in the day nursery sector, including consolidation, skills and strategies for optimising income.
Why is childcare such an attractive market?
Well, it can generate a very stable income; in recent years, the government funded free childcare entitlement has been expanded from three and four-year-olds to include qualifying children aged over nine months. From September 2025, qualifying children aged under five will be entitled to 30 hours of free childcare for 38 weeks of the year, up from 15 hours.
Demand for nursery places is consistently strong because childcare is so essential to the wider economy; most people with young children simply aren't able to work without it.
So scalable
This is also a sector that is characterised by its scalability, with continued opportunities for growth.
Over the last 15 years, the key trend in the day nursery sector has been the rise of smaller regional groups that have grown at an exponential rate after securing private equity backing, including Kids Planet, Bright Stars and Partou – formerly Just Childcare.
Today, they are continuing to consolidate, primarily through acquisition, buying single sites, small groups and larger groups with 20+ locations. But around 70% of Children's Day Nurseries are still operated by independents, so there is still the potential for new entrants to the market and further consolidation.
And the market can also grow further; some parts of the country still have poor access to childcare, though these tend to be more rural or deprived areas where delivery is more challenging.
Risk and reward
There are high barriers to enter the childcare sector, including gaining Ofsted approval and planning permission, which means it's not straightforward to just open a day nursery down the road. As a result, the largest operators favour leasehold premises, because it means they can keep growing their portfolios without incurring the debt that's often needed to purchase freehold properties. But operators need to carefully consider what those lease terms look like.
We see a lot of leases with rent reviews based on the Retail Price Index, but it is concerning that many lease agreements don’t have a cap and collar clause, which limits the maximum increase that can be imposed.
Property condition is also important. After all, your premises are your shop front when you're showing parents around and they will need continual investment.
Your premises and the service you provide is also assessed by Ofsted. That typically happens at least once every six years, and more frequently if they receive any complaints. If the worst should happen and you were downgraded to inadequate, there is the potential to lose government funding.
While larger groups can subsidise that loss for a short period of time – hopefully it would only be six months until you are reinspected – it could prove fatal for a single site operator as you're likely to lose most of your customers overnight.
Workforce worries
Workforce challenges remain a problem for many nurseries, primarily because government childcare funding has not always kept pace with rising staffing costs. That has meant it's not necessarily an attractive career choice and the sector is working hard to rebrand childcare as early years education.
The larger operators in particular have been starting up apprenticeship schemes and academies, which will hopefully bring a little bit more prestige to working in the sector.
One thing we always look out for in a nursery is a longstanding manager. That can speak volumes about the quality of a business and its workforce in what remains quite a transient market. If you've had a manager in post for over five years, that shows that you've got a good quality asset, and you're likely to have a team that are sticking with the business for a significant amount of time.
Operational efficiency
While the level of Government funding can help provide stability, it can also be a challenge. Though the hourly funding rate for children up to two-years-old is in most instances better than the cost of delivery, for three and four-year-olds, it's still significantly below.
So, nurseries have to look at other ways to generate revenues, which might include additional fees for earlier drop offs, extracurricular activities, nappies and lunches and these are regularly challenged by parental steering groups in the sector. And we regularly see nurseries where operational efficiency has not been optimised to drive value.
For example, we still see nurseries that don't run site-by-site accounts, or don't understand how many children they have at each point in the day, and therefore what their staffing needs are. That presents further opportunities to generate more efficiencies.
While the day nursery sector certainly isn’t without its challenges, it’s an industry that fulfils a vital role in the economy and which we expect will continue to prosper through 2025 and beyond.