The United Arab Emirates’ private education market is poised to contract by between 10% and 12% by September as a result of the Covid-19 crisis, a regional strategic consultant has said.

Speaking during a webinar hosted by this publication, Shaun Robison, chief executive of Dubai-based BBD Education, said he expected to see consolidation among school and nursery operators in cities including Dubai and Abu Dhabi, as businesses are pushed to the brink by government-enforced closures and revenue losses.

Nurseries and schools across the UAE were ordered to close indefinitely in March in an effort to stem the spread of Covid-19, but the country’s private education sector has since been starved of state financial support, despite potentially fatal cash crunches caused by widespread demands for fee refunds and discounts.

“Without any term-three revenue, it’s been a case of hold on tight and look to reduce costs, which can be difficult, because, quite often, schools here in the GCC don’t own their buildings – they rent,” said Robison. “There was already a lack of liquidity in the market, as some schools had a lot of bad debt already from term one and term two. Now, because of the economic climate, term three fees are not guaranteed, and it’s created massive uncertainty for both groups and single-site operators.”

As there is no legal requirement in the UAE for children to be enroled in nurseries, parents often require their services for only one or two days a week, said Robison, who owns a nursery in Dubai. This has made financial modelling “really difficult”, he said, as, despite the pandemic, nurseries’ operating costs have remained fixed while demand has diminished even further.

“Very few nurseries even got 25% of their [expected] term-three revenue,” said Robison. “It’s quite sobering… especially for the ‘mom-and-pop’ shop nurseries that are running as small businesses. Unfortunately, some of them have already closed and we’re not even in the deep summer months yet.

“The sector is walking a tightrope.”

More than three-quarters of the UAE’s education market is dominated by private players, the largest of which in the K12 sector is GEMS Education, which is backed by CVC Capital Partners and operates more than 60 schools worldwide.

Last month, ratings agency Moody’s downgraded GEMS to negative to reflect the risk that Covid-19-linked lockdown measures, which may continue into the next academic year, could “jeopardise” the firm’s strategy to reduce its debt burden, and “negatively affect” its revenue, earnings and cash flow generation.

Asked what Moody’s move suggested about the prospects of the wider UAE school sector, given that GEMS is a long-established operator with a diversified portfolio of assets, yet has seen its credit rating slashed, Robison said: “I think, on the whole, the sector is still attractive. The UAE has got a ton of medium-sized school groups that are pretty agile, not as aggressive in growth terms” and thus have less debt, “have got decent operational models, decent management systems in place and are asset-light as well.

“So, I think the sector will recover, but in the short term, the downgrading [of GEMS’ credit rating], especially in terms of foreign direct investment, puts a bit of a question mark over the sector.

“Groups in this crisis have generally been more agile, rigorous and fit for purpose. It’s the standalone schools that have really come under pressure… as they haven’t been able to move quickly and don’t have as many resources.”

Lured by historically high numbers of affluent expat families, whose educational needs drove double-digit growth in the UAE’s private education market for a number of years, prestigious British schools, including North London Collegiate School and Brighton College, have launched offshoots in Dubai alongside domestic investors. Other UK-based educational organisations, such as Middlesex University, have partnered with local private equity houses to establish branch campuses.

It has been widely reported that supply outstrips demand for premium private schooling in the UAE, with economic pressures poised to reduce education expenditure further. Robison, when asked for his outlook on the segment and its ability to weather Covid-19, said: “The sector is going to be, and is already, under pressure… and that’s why a lot of the premiums are discounting to, in essence, mid-market fees.

“Premium schools haven’t hit full capacity by any stretch. We’ve seen waiting lists drop off and availability [of places] is known across the sector.

“Any premium-level operator looking to open in the next two years [in Dubai] is going to have to do very, very careful due diligence on families” and demand levels.

Real estate investment trusts (REITs), which have a stranglehold on the UAE’s school property market after spending years hoovering up buildings and leasing them back to operators and owners, could see their rental income plunge as “schools’ growth forecasts”, on which existing agreements were based, “are now under stress”, said Robison.

“If we’re looking at post-Covid rental assumptions, they’re going to have to be looked at very differently as we’re going to have to consider the nature of post-Covid education. Are we going to see a blended school day, for example”, which would reduce dramatically the requirement for vast buildings and campuses. “The idea of escalating rent in a post-Covid environment just seems really out of touch with the education sector” and its needs, he added.

“The education real estate sector is going to be under a lot of pressure. Very few schools, I think, are going to be looking at REITs to help them post-Covid because they know that their rental conditions are harsh.

“I think that part of the sector is going to need to be completely repurposed for this new style of learning that we’re all embracing.”

Date published: 15 May 2020

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