A profitable education

As the warehouse and residential markets continue to boom, investors cannot count on being able to snap up any bargains, forcing them to look around for other promising assets. Could educational real estate, and in particular schools and pre-schools, be the new big thing?

Covid-19 has dashed the hopes of many, including small investors, who were hoping to make a quick return on renting out apartments – sales prices have risen but rents have fallen. “Before the outbreak of the pandemic, there was a great deal of interest in service premises for rent from investors, since the rate of return was sometimes twice as high as it was for rental apartments,” explains Jacek Kałużny, the associate director of residential capital markets at Savills. To this he adds that most landlords of such units wanted to rent them out to restaurants, beauty salons or medical centres. And also to educational institutions. “These were mostly private nursery schools or kindergartens, but they also included specialist schools,” he says. Now, however, an interesting alternative has emerged, although yet to really take off in Poland: investing (or co-investing) in large public education institutions. Building public schools or pre-schools [‘przedszkola’ – non-compulsory education for children between the ages of 3 and 6] with private capital is nothing new in Poland, but previously it was definitely a niche segment populated purely by companies that specialised in this.

Baby boom

The needs of the school and pre-school population in Poland have grown at an exponential rate in recent years and many local authorities have simply failed to keep up. According to Statistics Poland, between 2011 and 2020 the number of formally registered pre-schools rose by almost 17 pct to 22,300, but the percentage established by local councils came to just over 46 pct, while over the same period the number of children registered in such pre-schools rose by 38 pct, which is almost 1.128 mln. The data reveals that local authorities budgeted PLN 82 bln in total on education in 2020, while in 2011 the same figure was less than PLN 60 bln. “If this trend continues, we can expect new investment opportunities this year,” believes Jacek Kałużny. It’s also worth adding that government spending per child is growing much faster than inflation – over the last four years it has risen from PLN 700 to over PLN 1,000. “Investing in educational establishments has the advantage of not being dependent on the economic cycle and is not affected by the investment bubbles seen with certain real estate assets. Pre-schools and schools are always built in carefully chosen locations where they are guaranteed full classes over a minimum period of 10–15 years,” points out Mateusz Krajewski, the president of the Nationwide Education Operator [Ogólnopolski Operator Oświaty].

Cashing in on education

Certainly, large operators can make money from education by offering local councils favourable development conditions in return for certain promises for future development, but a slice of this cake can also be taken by small individual investors, when they join the project as co-investors. The Nationwide Education Operator, an NGO that was founded in 2001, raises funds from small investors. The results of its work with local authorities can be seen in Wrocław, Gdańsk and Łódź, in the form of educational establishments that are already up and running. It has also completed projects in small towns, like Czerwonak near Poznań, where a public pre-school was built with private money. Almost 5,500 children attend the schools and pre-schools built and managed by the foundation and these centres provide employment for over 1,000 people. As well as private investors, banks are also lending their support (quite literally) to this kind of investment. “In 2012, we received our first commercial loan to build a pre-school in Wrocław. The lender was Santander Bank Polska, and we still work with them today. Since then they’ve financed our educational projects four times,” says Mateusz Krajewski. According to him, investments in schools and pre-schools generate stable annual returns of 6–7 pct after between five and ten years of them being in operation. “Our projects are not ideal for everyone, as there is a minimum investment of PLN 500,000. This threshold exists because we want to maintain direct contact with all our investors,” he explains. The foundation is not concerned by Poland’s negative population growth and the prospect that these centres might eventually have to close if their local areas become depopulated. “We have carried out several studies that in particular examine development projects in the area, the age of the residents, the potential fertility rate, and also the surrounding office stock and the availability of work. Thanks to such multi-factor studies, we are able to ascertain what demand there will be for what kind of centre over the long-term,” he adds.

The foundation’s business model involves the local authorities providing the real estate, normally a plot on which to build the school or a building that can be converted for this purpose. “The operator not only has to complete the conversion work or the construction, but also has to fit out the centre so that it meets the required standards, before completing the handover and the registration. After this, the teaching staff are recruited and pupil admissions have to be completed. Once the centre opens it then has to be properly managed, which includes all the employment issues, both formal and financial,” explains Mateusz Krajewski. His foundation has completed more than 400 projects of this kind over the last twenty years of its operations across Poland. Currently, it manages 63 educational institutions and it completes three new projects a year.

Not quite so rosy

But is a school a sure-fire money earner? Well, according to Jacek Kałużny of Savills, the devil is in the details and especially in the particulars of the business model used for this type of project. It’s important whether the project only covers the creation of the centre (by either constructing it or converting an existing building) or also its later management. In his opinion, there are more risks with the latter option. “With educational investment projects, you also need to pay attention to the requirements and limitations imposed by the public procurement law. Moreover, individual investors who help finance a project need to always define their exit strategy in advance and write the appropriate clauses into their contracts with their partners, otherwise – no matter how attractive the rate of return or how stable a local authority partner undoubtedly is – we are still talking about an illiquid and niche investment,” cautions Jacek Kałużny.

Since local authority schools have been built with private money for many years in Poland, it is possible to assess their general profitability. Marcin Wojtkowiak, the mayor of Czerwonak, reveals that the idea of working with private capital came up during the tenure of his predecessor. “Everything was dictated to us by our need to open a new pre-school and by the state of the town finances,” he recalls. “We had limited funds to build a pre-school ourselves so we entered into a business deal, which has since paid off – we already had experience with private companies in running public pre-schools. So we were looking for a partner that was prepared to invest in return for our guarantee that they could run it as a public pre-school. Our part of the agreement involved handing over the perpetual usufruct to the land. The upkeep of the pre-school costs us the same as a more traditional public pre-school, but the difference is we didn’t have to budget for its construction,” adds the mayor. However, as he points out, despite the successful partnership with the operator the town is not planning any further projects of this type in the near future. “The local market has reached saturation point. The pre-school enrolments of five-year-olds, four-year-olds and in the now three-year-olds have been getting slower for each authority. That’s why we’re not convinced that this model is going to become commonplace. But if it does, it will be in the big cities, which are drawing in new people and where the demand for places in pre-schools continues to grow,” concludes Marcin Wojtkowiak.

The Rubi public pre-school in Czerwonak in numbers:

PLN 1 mln – invested by the foundation

PLN 2.5 mln – bank loan

app. PLN 3.45 mln – total investment

8 pct – annual return on investment

Source: Urząd Gmina Czerwonak, Nationwide Education Operator