Property has come to mean different things to different people in the last two decades; be it an investment vehicle for capital growth, somewhere a business trades from or simply a home. Whatever your understanding of property is, many believe the role of surveyors and valuers is simply to focus on the quality and value of bricks and mortar; but is it this simple?
Schools are generally accepted to be asset heavy with an intrinsic need for a large amount of space including classroom facilities, science blocks, sports facilities, ancillary areas, dormitory accommodation and all manner of associated buildings. As a consequence estate management should never be far from the day to day thoughts of bursars and other members of the management team.
As specialist surveyors within the education sector, many of our conversations with successful schools centre around growth plans. Historically a fairly simple means to raise funds for new classrooms or sports facilities has been to raise debt against some or all of the physical assets held by the school.
In years gone by this meant lenders would simply ask us to value the bricks and mortar over which a charge would be taken, but in today’s economic world where the prospects for independent schools are less certain, a more cohesive assessment is required. It is important to educate management teams, lenders and other key parties of the importance of considering both the value of the buildings and, in many cases more importantly, the actual commercial enterprise which takes place within. After all it is the business which services the debt, not the building.
So when carrying out valuation work for independent schools why is it important to consider bricks and mortar values as well as the business activity within?
Partly because the prime lenders to the education sector are rightfully focused on debt serviceability in the current economic climate, but also because after many years of our “banging the drum”, operators now agree that the provision of outstanding buildings and facilities is only part of the mix required to create a top-quality long term educational establishment. If the school as a business is trading its socks off then the lender should have a full understanding of this, whilst conversely the opposite is also important.
Perhaps the best way to illustrate this point is to look at a typical valuation report we would undertake for one of the key lenders to the education market. Our hypothetical independent school has been established for a century and has fared well in recent times, maintaining occupancy and retaining key members of the management and teaching team. A new sports hall is proposed as well as improvements to existing facilities and we are working on the instructions of the lender to consider the scheme.
Our remit tends to be fairly wide, but the three most important elements we would report on are:
The value of the existing buildings
Commentary surrounding the proposed scheme (including development costs and likely value of the facilities once complete)
Valuation and analysis of the school as a trading business including income profiling, cost benchmarking, profitability trends and commentary surrounding the long term commercial outlook for the sector as a whole.
It is this third and final element that in more prosperous economic times, when few businesses were failing and Middle England had more money in its purse, often went unconsidered.
Some have suggested that appraising the trading value of an independent school is somewhat irrelevant as such properties are seldom bought and sold as trading businesses (bar limited examples within the corporate arena), but this overlooks how specialist valuers asses the value of the trading business. In simple terms when we value the school as a trading entity, we spend time analysing the business performance, and comparing and contrasting actual performance to potential performance. In many ways, the actual value of the trading school is of less importance than the analysis of the business which is sustainable over the medium term.
The importance of analysing the business and providing commentary on trading activity is not simply to massage the ego of the school, neither is it to attack their methods, but rather it is to provide the key parties involved with some useful tools; providing the bank with reassurance that existing or future cash flows will be sufficient to service debt and providing the management team with something that is fairly rare in this sector, a third party, impartial assessment of the performance of the business, normally complete with consideration of where improvements could be made. Whilst we are working on the instructions of a lender in most cases, the time we spend looking at any given school as a trading business can have tangible benefits for the management team, providing an opportunity to reflect on future strategies.
Not all projects require such breadth of consideration and we would not advocate the need to undertake a full commercial review of a school if the only debt being sought was to rebuild the school gates for example, but also it is important for management teams to recognise that schools are all too often inward looking and there are seldom opportunities to compare trading performance with their peers and the wider market. Why not rely on the experience of specialist education advisors to do so on your behalf?
So next time you are seeking advice surrounding property within a school, whether you are the management team or the lender, do consider the potential benefits of an expanded remit looking beyond the bricks and mortar and focus on the more important consideration of what actually goes on within.
Tom Robinson is an Associate at ES Group, working within the education and healthcare sectors, providing valuation and advisory services to funders, operators, professionals and key stakeholders in the profit and not for profit sectors.