In another five years the GCC region will need more than 7,000 schools to satisfy demand, an industry forecast from research firm Alpen Capital shows. The region will have nearly 15 million students by 2020, up 3.6% from 12.6 million in 2015, and interestingly demand these days seems more skewed towards private education, bucking a longstanding trend in the Gulf where the local population has historically preferred public schools. The Alpen Capital report indicates that demand for private schools stands at 5.4%, much higher than the 2.6% forecast for the growth of public schools.
School operators are taking note. The U.A.E. saw eight institutions open in 2016 while many international schools, such as the North London Collegiate School and Brighton College from the U.K., have announced plans to open campuses in Dubai. The economic case for schools is not minor, if industry numbers are to be believed. “The market for private international schools in Dubai is worth about $1.5bn,” says Ashwin Assomull, managing director of Parthenon-EY. “That’s across price points and curricula.” A key boost for the growth is the presence of a large expat community. According to a report by the International Schools Consultancy, the U.A.E. has the highest number of English-medium international schools, with nearly 589 educational institutions. “The market for private schools in the Middle East is a great opportunity, which is why some of the most prestigious schools in the U.K. such as North London Collegiate School and Brighton College look at the region when they think about foreign expansion,” says Assomull.
It is not just foreign operators that are looking to cash in. Private equity funds—both local and international—are upping their stakes in local school operators. In 2014, an investor group, including the New York-based Blackstone Investments and Bahrain’s sovereign wealth fund Mumtalakat and led by Fajr Capital, acquired a minority stake in Dubai-based GEMS Education. The interest of homegrown funds has also been piqued. Abu Dhabi-based Gulf Capital announced a $30 million investment in another school operator, Evolvence Knowledge Investments, in 2014 while GFH Capital acquired two schools in Dubai during the same time period.
Another investment firm, Al Najah Education, has been steadily increasing its footprint through various various acquisitions. The group, which is part of private equity firm Al Masah Capital, has acquired Horizon International School and opened Sabari Indian School in Dubai. According to the firm’s CEO, Nrupaditya Singhdeo, the demand for quality education is only set to rise over the next few years, making investing in education a good bet.
“The education sector in the markets that we operate in is still highly fragmented and the opportunity for consolidation exists. At the right valuation and growth potential, we are optimistic about further investment in both the pre-schools and K-12 segments.” Al Najah Education is potentially looking to expand its K-12 school portfolio in the GCC while focusing on pre-schools and nurseries in South East Asia, he adds.
But is the demand for schools inflated in the region with the sector perhaps heading to a potential oversupply? Not so, according to analysts. “In an increasingly competitive region, parents see education as the silver bullet that will allow for a brighter future for their children (either in the region or beyond), and they are willing to pay as much as they can afford,” says Rasheed Eltayeb, Vice President at Booz Allen Hamilton.
“Governments in the Middle East region have also started to relax regulations (e.g. licensing, land provision, etc) and are allowing the private sector to play an increasing role in meeting the school-level education demand. This all makes for an attractive market, which international asset managers and other international investors are eager to capitalize on. There are some compelling success stories, notably in the U.A.E., that if replicated across the wider region could make for increasingly attractive investment opportunities for years to come.”
A Sure Bet
Typically, for a school to be attractive to an investor, it needs to provide a return on investment (ROI) of 16-20%, according to Assomull. The region seems to have a healthy ROI for those that have good targets in sight. As per a report from the Abu Dhabi Education Council (ADEC) in 2015, private schools in the emirate earned close to AED 3 billion in profit between 2011 and 2014. Dubai too provides ample opportunities as demand is outstripping supply so rapidly, says Assomull. He explains that opening a school in the emirate now is much easier, thanks to the regulator Knowledge and Human Development Authority’s (KHDA) commitment to step up supply across all price points and curricula. With such prospects, it is not just the private equity firms that are thinking of a foray into education.
A report by property consultant JLL reveals that the demand for private schools is increasingly attracting real estate developers who are seeking alternative investments as options in traditional sectors of residential, office, retail and hospitality dry up. “The requirement for around 350 private schools presents significant opportunities for real estate investors, developers and builders,” says Craig Plumb, Head of Research, MENA, JLL. In the U.A.E. such a trend is already prevalent, with a handful of developers firmly establishing their positions. Fortes Holdings, a company with diversified interests, has a dedicated education segment called Fortes Education, while Abu Dhabi-based Bloom Holdings too have an education-focused branch.
The latest one to try this model is Sobha Developers, with the launch of Hartland International School within their development in Dubai. Assomull says that many are venturing into education because it could add value to the project or the township they are developing. “We have seen this in Malaysia and parts of China,” he explains. “When somebody wants to attract more people to a development or a township, they partner with someone to bring in a school to a township. That will increase the value of the project.”
It is debatable why many new investors, such as the real estate moguls, are opening new schools instead of partnering with existing players. But analysts say that not having good targets could be impeding the deal activity. “A lot of times we have investors coming in saying that I want a stake and I want to buy a school or I want to buy a group of schools,” says Assomull. “But the schools that are out there don’t want to sell. The owners and the operators are making good returns so they don’t want to sell it at a valuation attractive to a buyer.
We don’t see that much M&A activity in schools in the region because schools are doing well.” Others opine that investors might be more encouraged to enter if there are more incentives. Booz Allen Hamilton’s Eltayeb believes that the region should “adopt a far more open approach to attract investments in the education sector.” Regulatory frameworks, especially in the region’s largest markets, need to play catch up “so that they ease investors’ entry into the market, especially with regard to licensing, land provision and accreditation,” he says.
For a new player to start from scratch in the GCC, numerous factors could come into play, such as the availability of land and regulations in a certain jurisdiction. Meanwhile certain geographies might be challenging even for established education firms. “If you look at Doha, some of the operators are concerned not only with the difficulty in finding land but also how the regulators are operating in terms of the clarity in policy and decision making.
In Saudi Arabia, one of the issues is how to recruit teachers and that is a big operational concern,” says Assomull. With the school-going population in Dubai, Abu Dhabi, Jeddah, Riyadh and Cairo expected to reach one million by 2020, experts are hopeful that policies will become a lot clearer for educators. “The good news is that we can expect this to change, more-or-less region wide in the medium and longer terms, especially as more countries in the region look at policies to enhance education outcomes as a key enabler of economic diversification,” says Eltayeb.
A Tough Grade
Like most other sectors, education is not immune to the headwinds in the economy. A 2017 PwC report notes that cost will “play a critical role in changing the supply-demand dynamic” among schools. In Dubai, some have already folded due to being economically unviable. Delhi Private School Academy’s campus in Dubai International Academy City announced in October 2016 that it will be closing, while The Westminster School returned from the brink of closure after intense lobbying. Closures come against the backdrop of staff allowances being slashed in the Gulf as firms scale back spending in a cautious environment.
A 2016 report from Aon Hewitt showed that education allowances were up 5% in the GCC, but warned against viewing it as an overall increase across the board, clarifying that a number of firms were undertaking a market correction, hence the spike. The stagnation in allowances could put additional strain on parents who might already be under pressure from inflationary costs. Recent research from HSBC reveals that nearly 75% of parents surveyed in the U.A.E. found that children’s education made it difficult for them to keep up with other financial commitments.
School operators are not ignorant of this, with some devising ways to alleviate the strain on parents. Recently GEMS Education introduced a rewards and loyalty program in an effort to make education more affordable. Dino Varkey, Managing Director and Board Member, GEMS Education, says: “We recognize that there is a lot of pressure on families. We want to use the power of our network of schools and the power of our community to provide tangible benefits that will make a real difference for parents and families. A long-term aspiration is that this program makes tuition ‘cost neutral’.”
But experts comment that a cutback in allowances and benefits might not immediately affect enrollment numbers at schools or the investor appetite in the region’s education sector. “Many parents who receive education allowances can be expected to continue to prioritize the education of their children, making up the difference in cost themselves, especially if their children are in the best schools. Pulling children out of schools where they are settled is usually a last resort for parents,” says Eltayeb.
“Secondly, from a more strategic standpoint, the supply of schools will continue to grow to serve the increasing volume of pupils. We expect this to continue to create opportunities and value for investors. In the U.A.E., for example, we could see the emergence of a more mid-range price point (given most schools today in Dubai are at the low or high end of the price spectrum), which could represent interesting opportunities for investors.” Meanwhile Assomull say that schools might have to compete harder if supply rises in the face of lowering enrollments. “They (schools) need to have something special to keep students. In many ways it is going to improve the quality of the education.”
Even as challenges appear on the horizon, education is an attractive option to investors who have no plans to slow down. Al Najah’s Singhdeo says that his company will continue to invest in its target markets. “In the MENA region, we will focus on our core markets of the U.A.E. and Oman and opportunistically look to expand in new markets including Kuwait and Qatar.”
After all, investors are hoping to perform a class act as they pool in resources to take a stake in the Gulf’s schools.