Roundtable discussion: key shifts in today’s fiscal & day nursery markets

For a roundtable event held in July 2025, NatWest’s Aastha Gupta (European Economist) and Christie & Co’s Courteney Donaldson (Managing Director – Childcare & Education) led the discussion on the UK economy and the state of the day nurseries market. For the afternoon, the pair were joined by a selection of early years operators from across the country, of a range of different operational sizes.

Below are some of the key takeaways.

THE UK ECONOMY AND ITS IMPACT ON THE SECTOR

Overview by Aastha Gupta, European Economist at NatWest

“The underwhelming growth in the UK is on the back of several structural headwinds (like adverse labour participation, lack of business investment, etc.) and few cyclical factors, and these factors continue to weigh on the economy’s potential.” - Aastha Gupta, European Economist, NatWest

The balance between opportunity and challenge – growth on one side, and inflation, labour shortages, or policy constraints on the other – is exactly what defines the UK economic outlook right now. 

To understand where we are now, it’s important to give some context on the economy from 2022 to 2024, which was a time defined by turbulence. The UK, like most advanced economies, experienced a severe inflation shock in 2022 caused by the Russian invasion of Ukraine. Supply chain disruptions and post-pandemic imbalances compounded the problem. Inflation peaked at over 11% in late 2022. In response, the Bank of England (BoE) raised interest rates to 5.25% in just 18 months, which resulted in a sharp rise in borrowing costs, subdued consumer confidence, and stagnating growth. The economy flatlined for much of 2023, and while we avoided a deep recession, the pain was widely felt, particularly by households facing rising mortgage payments and businesses managing wage and energy cost pressures.

The central theme in this outlook is that UK GDP growth has been trending lower compared with past episodes. UK growth has moderated across various cycles: for example, the “Great Moderation” period of early 2000s or the pre-global financial crisis period saw average growth of 2.8%, which contrasts sharply with post COVID-19 period (2023-27), where growth is projected to be less than a third at 0.8%; lower that the trend growth rate 1.25%. Structural factors include adverse labour participation, lack of business investment, excessive tax, regulation and Brexit dislocation.

Headline inflation is well below its peak in late 2022. It returned briefly to 2% target in mid-2024 off the back of falling energy prices. That has largely unwound and, together with upside effects from the Budget (direct and indirect), is forecast to keep Consumer Price Index (CPI) above target until early 2027.

Core inflation – excluding food and energy – has also moderated, though services inflation remains somewhat sticky off the back of wage inflation, which is a big component of services. Underlying inflation is easing but remains awkwardly high. We do not expect a return to target until early 2027. The next few months will be a crucial test of the extent to which firms can pass higher costs (NICs and minimum wage rises) on to consumers. Wage inflation is moderating broadly as expected, though CPI target-consistent levels of circa 3% are not expected to be reached until late 2026.

At the time of the roundtable, the BoE’s bank rate stood at 4.25%. Markets expect gradual cuts to continue later this year. We expect 25bps cuts in August and November. The BoE remains cautious, prioritising a sustainable return to target inflation and watching wage dynamics closely, especially in the light of recent NIC and minimum wage rises that came into effect.

Unemployment is rising slightly but remains low by historical standards. Job vacancies have declined. Labour supply is still a constraint in some sectors, but the overall labour market is rebalancing, though there are pressures that are being evidenced by recent labour market data.

In contrast, household income has been surprisingly buoyant. UK households enjoyed the strongest nominal disposable growth in 2023, increased by 9.3% and in 2024, at 7.3% since the early 1990s. Even after adjusting for inflation, real disposable income also posted substantial income growth of 2.3% in 2023 and 4.2% in 2024 as inflation moderated, which is above long-run averages. However, many households are still adjusting to higher mortgage payments as fixed-rate deals expire, which has also driven higher precautionary savings amongst households.

Views from early years providers in the room

• It’s difficult to say where we see interest rates heading in the next 12 months, but it’s going to be higher than the historical trends that we have seen in the pre-COVID era
• What support does NatWest offer small nursery business owners? The sector needs support from the sector across the board. The support hasn’t been there before, but NatWest is making a concerted effort to change this. Find out more about that support here

Looking ahead

Our base case is one of gradual normalisation and not of acceleration. UK growth is expected to remain tepid. We forecast UK GDP growth of just 1.0% in 2025 and 0.7% in 2026. There are both cyclical and structural issues that are weighing on growth and business investment.

Underlying inflation is easing but remains awkwardly high. Demand is not particularly strong, though household nominal disposable income has been unusually buoyant in recent years, hence overshooting inflation alludes to an impaired supply-side. We forecast CPI inflation to remain above its 2% target until late 2026.

The UK's fiscal outlook appears ever more precarious, with the Government having been forced into several significant policy U-turns on welfare spending. Confirmed policy reversals - winter fuel and disability payments, for example - erode two-thirds of the already slim £9.9 billion of fiscal headroom; other measures (e.g. child benefit payments) might erode the remainder. With the Government seemingly unable to deliver spending restraint, some combination of tax rises and fiscal 'rules' dilution appears increasingly inevitable at the Autumn Budget.

Our forecast remains for 25bp cuts in the BoE’s base rate in August and November to a 3.75% terminal rate. Downside risks have increased over the past month - ongoing gradual easing into 2026 rather than faster/larger rate cuts in 2025. But the latest inflation data has somewhat challenged this view of further easing in 2026, where inflation is proving to be a lot of more sticky. But a lot of this will hinge on the employment data, in my view.

THE STATE OF THE UK DAY NURSERY MARKET

Overview led by Courteney Donaldson, Managing Director – Childcare & Education at Christie & Co

“As reported in our ‘Childcare & Education Market Review 2025’, the first half of 2025 saw exceptional momentum across the childcare and education sectors, significantly outperforming previous years and, indeed, surpassing our predictions. While we anticipated increased activity and consolidation, the scale of market engagement has exceeded expectations. Despite OECD forecasts suggesting the UK would experience the slowest growth among developed nations, the childcare and education markets have defied this trend. Transactional activity, capital values, and buyer appetite have all surged. Notably, businesses are achieving 96% of the asking price, and we anticipate double-digit price growth by year-end.” - Courteney Donaldson, Managing Director – Childcare & Education, Christie & Co

Despite a backdrop of economic and global uncertainty, the childcare and education market has shown remarkable strength and resilience. Lenders remain deeply engaged in the sector, and early-year predictions laid out in our Business Outlook 2025 report have largely held true. Much of the surge in market activity throughout the first half of the year can be attributed to the Autumn Budget, which catalysed widespread movement, particularly surrounding the changes to Business Asset Disposal Relief (BADR). The rush of deals before and after the announcement was significant, marking a turning point in transaction volume and urgency. We expect this to continue in the run-up to the next BADR tax change effective 5 April 2026, indeed, exits could be further fuelled off the back of the Welfare Reform Bill defeat. Within its wake, tax increases are now anticipated in the Autumn Budget.

Parental demand for childcare continues to grow, driven by the need to balance work commitments with family life. This has intensified interest in high-quality childcare settings, especially those that prepare children for school-based environments; something noted by Bridget Phillipson in her advocacy for school readiness.

Across all childcare and early education sectors, this has been the strongest first half of the year we’ve ever recorded. Activity levels have surged: inspections, viewings, new listings, offers, and brokered deals have all climbed substantially. In particular, day nurseries with long-standing reputations and strong earnings have entered the market in greater numbers than ever before, attracting a wave of buyers eager to invest in this needs-driven sector.

Buyer preferences are shifting, too. While the average UK nursery accommodates around 45 children, demand is rising for larger settings. This year, nurseries purchased through our network averaged nearly 89 places, indicating a clear appetite for scale. Even first-time buyers are still active in large numbers and are aiming for settings with the capacity for circa 50 children.

The sector’s momentum continues even in the face of wider challenges: rising National Insurance, international conflicts, and political turbulence. Investors, some of whom are driven by ESG priorities, are certainly not deterred. Instead, they are entering the market with purpose, seeking to make meaningful contributions to early years education.

Operationally, workforce pressures appear to be stabilising in many nurseries, suggesting tentative recovery despite prior strain.

Going forward, the focus is turning to funding. While new funding streams are critical, there’s concern that existing support may begin to erode over the next two to three years, as the rates fail to keep pace with inflation. Nonetheless, we’re optimistic about the road ahead. Market activity is robust, sentiment is positive, and buyers are plentiful.

New-build provision remains limited, but with the level of engagement and energy currently seen across the market, there's every indication that new-build nursery developments will gather pace and scale over the year ahead.

Views from early years providers in the room: Current operations

• Some operators favoured new builds; they said that, when teamed with better returns on investment, compared with acquisitions, creating purpose-built environments allows providers to tailor the setting to specific wants and needs. Though this, of course, depends on a multitude of factors - finding the right land in the right location for the right price. But, if you’ve got existing assets that are open already and new build assets as well, that can be the winning combination
• Are the changing market conditions, with some settings moving towards revenues being over 80% government-funded, impacting nursery valuations? For some new buyers coming into the market, notably REITs, they like government-backed income streams
• In terms of how a shift towards more settings becoming reliant on government-backed income may impact the market, much will depend on what happens to funding rates over time
• During the first six months of 2025, there has been a significant increase in the amount of consolidation seen. A large amount of Private Equity (PE), new PE and REITs, including US REITS, are interested in buying freehold assets tenanted by childcare and education providers. They’re looking for UK opportunities to deploy their capital
• Lots of change, growth, movement, and expansion in the UK market
• For successful acquisition of operational entities, post-acquisition integration is key
• Levelling up on fees is making a big difference, helping the north with fee income. Previously, everyone wanted London and the South East, but it’s spread much wider now. People are much more open to other UK areas
• Buyer and investor activity is strong right across the country – from Scottish hubs of Edinburgh and Glasgow, down to the South. London and the South East remain core hot spots, while activity in Wales has remained subdued, in part due to the different funding and regulatory environments

Views from early years providers in the room: Looking ahead

• The Minister for Early Education, Stephen Morgan, is supportive of the sector and seems to be actively listening – he’s regularly out seeing day nurseries and speaking with local operators
• There’s still a way to go on statutory guidance and the consultation of external space
• The Government said it needs another 70,000 childcare places to deliver on its policy, but it really comes back to the quality of the places/settings. Buying an existing property/business is one thing, but the delivery of quality when you get in there is another, and quality is crucial for children, families, staff retention, growth and success
• On funding rates and policy, the Government starts by giving a generous contribution and then squeezes it going forward. There’s an inconsistency in policy, and the playing field between PVI and school-based nurseries is far from level. While a mixed market, there needs to be funding and regulatory equality for all providers 
• For funding, there should be very clear input levels to show what a difference we’re making to the lives of children in our care.

For a further in-depth view on the day nurseries market in the UK, contact Courteney Donaldson at Christie & Co (courteney.donaldson@christie.com).