Valuations in the VAT era
How can you leverage your school’s most valuable asset? asks Ian Mollon, director at property consultant Aitchison & Rafferty
As January and the introduction of VAT on independent school fees looms, the sector is bracing itself for heightened financial pressures. For school owners, bursars and leaders, this new operating environment requires a strategic approach, particularly in how schools assess and leverage their most valuable assets – property.
This article considers the importance of accurate property valuations, as many schools look for their best route to financial health in the coming VAT era.
For most independent schools looking at ways to mitigate the effect of VAT, their options fall into two categories: maintaining revenue by ensuring their school continues to be appealing and valuable to parents who will carry the burden of additional costs on their fees; or possibly streamlining operations to maintain the bottom line – often in the form of consolidation (mergers and acquisitions).
Increasing revenues: property development, VAT reclaim, and repurposing
One unexpected benefit of the introduction of VAT on school fees is that schools, now classified as VAT-registered businesses, will have the ability to reclaim VAT on capital projects such as refurbishments or the construction of new facilities. Previously, schools were unable to reclaim VAT on such expenses, meaning they faced higher costs for maintaining and developing their properties. This shift in VAT status now opens up new opportunities for schools to invest in their campuses at a reduced net cost. This capital investment will in some cases increase the value of their portfolio, especially if it leads to additional capacity (revenue) for pupils.
Schools considering upgrades to their sports facilities, science labs, or boarding houses may now be able to reduce the total cost of these projects by reclaiming VAT. This could encourage schools to pursue property development projects that might have previously been financially prohibitive, helping them to remain competitive and attract new pupils, despite the rising cost of fees.
In addition to new development, property valuations can guide schools in exploring options for repurposing or selling parts of their campus to generate additional income. Schools with underutilised land or facilities may find value in leasing their property for commercial use, such as corporate events or community activities, or even selling unused land for residential development. This approach allows schools to continue operating while generating revenue from their real estate, providing a financial buffer against the challenges posed by VAT.
Schools could also explore creative partnerships with other institutions or businesses to share the cost of maintaining their properties. Such collaborations are even more attractive now that schools can reclaim VAT on joint capital expenditures, making shared development projects more financially viable. Property valuations will be critical in determining the value of these opportunities and assessing how they fit into the school’s overall financial strategy especially where a purchase is considered between the parties.
An alternative path to financial health: mergers and acquisitions
While any change in ownership is a huge decision for any school, it cannot be ignored that, in this era of additional financial pressures, mergers and acquisitions offer a realistic and attractive way for schools to consolidate resources, streamline operations, and leverage shared services and assets.
When independent schools look to mergers or acquisitions, the value of their property holdings is a key consideration. Real estate often represents the most substantial asset in these transactions, making accurate valuations essential to the negotiation process. Schools with accurately valued property portfolios can use this knowledge to their advantage in negotiations, while those facing financial difficulty, but holding valuable real estate, can use it to secure better terms or to offset any liabilities.
An expert valuation will assess a broad range of factors, including the location, condition and potential alternative use of a property. In some cases, property may have significant value if it can be repurposed for commercial or residential use, should the school no longer occupy it. However, schools must also consider potential planning restrictions or listed building statuses, which may limit the property’s redevelopment possibilities.
The cost of maintaining historic or large properties must be factored into any M&A discussion. While a property may have high market value, ongoing upkeep or refurbishment needs could pose a significant financial strain, which potential partners must consider. Accurate valuations ensure that schools have a realistic understanding of the financial implications of maintaining, selling, or merging property assets.
School buildings: an emotionally charged asset?
Mergers and acquisitions always carry inherent risks, particularly in the emotionally charged environment of education, where campuses and beloved buildings often form a central part of a school’s history and identity. The decision to merge or sell assets can be met with resistance from staff, students and alumni, and for all sorts of reasons – some practical, some not.
Accurate property valuations provide school leaders with an objective basis for decision-making. This ensures that discussions around property are grounded in financial reality, rather than sentiment.
The introduction of VAT on independent school fees presents significant financial challenges for UK independent schools, but it also offers new opportunities for strategic property management. As schools face increasing financial pressure, property valuations will play a central role in determining their future direction.