Demand for schools in Dubai outpaces supply

School operators are struggling to keep pace with demand for as many as 52 new schools in Dubai by the end of the decade.

Funding has emerged as a key challenge for operators that need to stump up an average of Dh275 million to develop a school capable of supporting between 500 and 2,000 students, says a report from Colliers International.

Competition between schools for talent is also fuelling the poaching of teaching staff.

A reluctance by banks to offer long-term funding to all but the largest of operators threatens to deter investment needed to build new K12 schools despite burgeoning demand driven by a student population expected to swell to 360,000 by 2020. The current student population of the emirate is estimated to be about 270,000.

“Operators have the capability to achieve this target but it depends on getting the finances,” said Mansoor Ahmed, the director of development studies for the education sector at Colliers. “Supply is not catching up with the demand because of the high set-up costs, and attracting and retaining quality teachers.”

Moreover, as costs for operators rises, so do school fees, he said.

Despite the funding challenges, school operators from India, the United Kingdom and the United States are looking to enter Dubai in partnership with local investors, Mr Ahmed said. There are 158 private schools, with 58 per cent catering to the UK curriculum followed by the US and Indian curricula. 

Bank finance is typically restricted to established players, making it difficult for new entrants.

Moreover, the loan terms favoured by banks are typically between five and seven years, but the education sector often needs 10 to 12 years to pay back the loan, Mr Ahmed said.

The funding challenges facing the sector have been underscored by a flurry of recent deals involving groups such as Gems Education, the largest private schools operator in the region.

In July, Dubai’s Fajr Capital, the American private equity firm Blackstone and Bahrain sovereign wealth fund Mumtalakat acquired an undisclosed minority stake in Gems Education emerging markets business in the Middle East, North Africa and East Asia.

The sale of existing school buildings to investors on a sale and leaseback model is one way that schools can extract cash from their business, according to Colliers

In 2013, the US asset manager PineBridge Investments bought a Gems school campus in Dubai, and planned to lease it back to the school for more than 20 years. It was among the UAE’s first sale and leaseback deals.

“If you have a strong business model and have an ambitious strategy in place for the future, accessing financing through banks or equity investments should not be difficult as the demand dynamics are strong,” according to a spokesman from one Dubai investment firm.

And the returns are potentially lucrative for investors targeting the sector.

Typically real estate investments in the private education sector generate yields of between 9 and 11 per cent, while the internal rate of return for education operations range between 15 and 23 per cent. The high yields in real estate in this sector attract property investors, while operators can focus on running the schools, Mr Ahmed said.

Colliers highlights the large expat population of Dubai born between 1965 and 1980, referred to as Generation X, as one of the main factors behind the growth of private sector education in the emirate.

About 97 per cent of Dubai’s population is below the age of 50.

Rising demand for school places is also driving inflation in the sector.

The emirate’s Knowledge and Human Development Authority caps school fee increases according to a formula linked to their educational performance.

But despite the caps, school fees represent an increasing financial burden for many parents in the emirate.

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