The sums add up for new investment in GCC education
Population growth in the GCC is spurring new investment opportunities in the region’s education sector, according to a new report by Strategy&.
However, regulatory transparency coupled with higher demand increases risks.
As the sector matures, new opportunities are expected to crop up in education support services such as textbook distribution; education infrastructure; and information technology, Strategy&, a PwC subsidiary, said.
“It will not be enough to simply buy into the strong market for private education in the GCC and ride its growth as it is typically priced into valuations,” said Marc-Albert Hamalian, a Strategy& partner.
The GCC population is projected to reach 65 million people by 2030, and a third of that number will be under the age of 25.
Yet the critical aspect for the private sector is the transparency of the regulatory framework, said Bilal Mikati, a principal at Strategy& Middle East. “Clear policies and procedures for licensing of new institutions and transparent inspection criteria and ranking, help level the playing field between investors and ensure alignment between investment performance expectations and reality,” he said.
Strategy& highlighted four investment plays for the savvy financier with the easiest route being to acquire established companies, with the UAE and Saudi Arabia leading the way in attractiveness. Both countries represent 69 per cent of the GCC’s private K-12 enrollments in 2014, and some investors have already got on board such as Dubai-based GFH Capital’s acquisition of two schools for US$88 million.
Other areas ripe for investment include specialised services, such as Abu Dhabi’s push to expand the number of educational institutions that cater to autism. This leads to an opportunity to combine an established school acquisition with a niche sector, or consolidation said Strategy&.
The fourth area, taking a play out of the growth strategy of the fast-food chain McDonald’s, is to acquire land and lease it back to the schools. Strategy& said real estate sale-leasebacks tend to fall on the lower end of the risk/ return spectrum, offering a bond-like cash flow profile that includes periodic dividends from rental yields.
The educator-turned-consultant Judith Finnemore said that times were changing from the days of fast cash from school investments. She said new regulatory demands placed on schools have driven up the costs of operation and decreased profitability.
Ms Finnemore, a consultant at Al Ain-based Focal Point Management Consultancy, said owners previously had full rein to pocket all the profits but Abu Dhabi has since placed a 15 per cent cap on owner profit-taking. “Around 80 to 90 per cent of the income that schools generate should be invested in staff,” she said, adding that some schools were previously able to get away with paying staff less than Dh2,000 a month. “They can’t get away with that any more.”
Maintenance upgrades, such as sprinkler systems, can cost at least Dh1 million while better qualified staff mean higher salaries, which also cuts into profits. As little as three years ago it only cost about Dh7.5m to open a school, but that has increased to Dh40m, said Ms Finnemore.
That has not stopped the sector’s investment surge.
David Allison, the chief executive at the educational consultancy SSAT Middle East, said there had been big increase in quality schools opening across the Emirates.
“I think the way to look at it from an investor’s point of view is that it’s a long-term investment,” he said. “The clients that we’ve worked with want to add a school to their portfolio as an investment of 20 years or more.
“I know investors that have other companies, but schools kept them afloat during 20102012,” he said.
“It’s interesting, but there’s always a need for schools and a need for hospitals.”