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Significant surge in investor demand for childcare centre assets

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With leasing rates at an all-time high and yield compression increasing, childcare assets are hot property

Like all property sectors, childcare centres were impacted by the advent of Covid-19, investor demand initially stalled with a ‘wait and see’ approach adopted, yields levelled at an average of 6.5%. But as the Federal Government introduced its national relief package in July 2020, and the essential nature of the service kicked in, investors were once again attracted to the long lease terms and overall industry strength. Market activity returned with an influx of sales, this was reflected in overall yield compression and capital growth, the average yield shifted to 5.75%.

According to Dylan Adams, Director Valuations & Advisory Services at Colliers, irrespective of the second lockdown period in 2021, investor sentiment is not only strong but continuing to improve.

The market is still focussed on alternative asset classes that are needs-based which ultimately has reflected even more yield compression in the childcare sector on a national level. Post July 2021, the average yield for childcare assets is now 5% reflecting 75bps compression from the first half of 2021,” Mr Adams explains.


According to Australian Children’s Education & Car Quality Authorities NQF Snapshot there are 16,452* centre-based childcare services operating across Australia as at Q2 2021, which reflects an increase of 2% from Q2 2020. There are a range of factors driving the strong investment interest in this asset class.

“Childcare assets are seen as ‘recession proof’ and an ‘essential service’ with purchasers viewing tenancy de-fault in the low-risk category – particularly given the significant government funding available to the operators,” Ted Dwyer, DirectorInvestment Services Melbourne, says. “This coupled with the low interest rate environment, will continue to see assets transact at similar yields moving forward.”

A typical childcare centre lease will range from 15 to 20 years with options for fixed rental increases, guaranteeing a secure income. They also tend to hold triple net lease structures where the tenant pays outgoings. Another investment driver is the accessible price point opening the asset class up to wider buyer pool.

“In Victoria childcare transactions have been dominated by local private investors with additional interest from offshore – mainly Hong Kong,”
Mr Dwyer says. “The 5% yield compression barrier has well and truly been broken with a significant number of non-regional assets now transacting below this level.”

In the last month Frank Oliveri, National Director Investment Services, and Jordan McConnell, Associate Director Investment Services, transacted three off-market childcare centre deals in Sydney with a combined value of over $36 million.

“We are witnessing a weight of capital towards those newer, larger placed centres [80 places +] across greater metropolitan locations,” Mr McConnell says. “A number of new entrants comprising smaller funds and syndicates are joining the traditional institutions in beginning to compete with the high-net-worth-individual [HNWI] capital. This is even being witnessed on an individual asset basis, where previously primary interest was only in portfolio offerings.”

Colliers’ Queensland operation has also seen a shift in the investor make-up pursuing childcare centre assets, specifically the entry of Real Estate Investment Trusts (REITs), according to Tom O’Driscoll, Director Investment Services Brisbane.

“The transition of new REITs and syndicates entering this space and chasing portfolios, with a preference for a minimum $30 million outlay, is beginning to compete with HNWI capital,” Mr O’Driscoll explains. “Traditionally only Charter Hall Social Infrastructure REIT and Arena REIT dominated this area but over the past 12 months we have seen a number of new entrants competing. In Queensland, yields have compressed 50bps for quality new performing centres.”

Nationally, the team believes childcare centre assets will continue to be one of the most sought-after property investments, given the ongoing Federal Government funding commitment and the inherent favourable vendor lease structures. There has been significant growth in childcare centre leasing rates across all markets in New South Wales, Victoria and Queensland, according to Taylor Gray, Senior Executive Project Leasing.

“Within the inner Sydney market, for example, leasing rates are at an all-time high sitting at $6,000 per place p.a. While in Sydney’s South West and North West growth suburbs, childcare centres are demanding rates around $5,000 per place p.a.” Mr Gray says.

The regional migration spurred on by the pandemic has in turn driven a significant demand for regional childcare centres. Many of the major childcare operators are looking for sites regionally, with Mr Gray identifying the Central Coast, Hunter Valley and South Coast in NSW as experiencing particularly high demand with rates starting from $3,000-$3,500 per place p.a.

*https://www.acecqa.gov.au/nqf/snapshots


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Dylan Adams

Director | Valuation & Advisory Services

Sydney

As Director of Specialisations, Dylan leads a team of experts to provide the highest quality self-storage valuations, service station valuations and valuations of child care centres and other education infrastructure throughout Australia and New Zealand. Dylan is a certified pracitising valuer, Associate Member of the Australian Property Institute and Member of Royal Institution of Chartered Surveyors. Dylan has extensive experience working with financiers, owners and stakeholders to generate greater outcomes from their property assets.

Self-Storage Valuation Expertise

Dylan has a strong connection to the self-storage industry as a member of the Self Storage Association of Australasia and a thought leader who has elevated industry understanding by creating the Self-Storage Rating System for self-storage investors. Dylan provides reliable and confidential advice to both leading self-storage industry participants and active lenders within the ANZ market having valued the largest individual and portfolio transactions.  

"The Colliers self-storage valuation team, lead by Dylan Adams, have undertaken valuations for our business for a number of years. They have developed a strong capability, understanding and expertise in the sector and are well regarded by industry stakeholders.” Sam Kennard | CEO, Kennards Self Storage.

Service Station Valuation Expertise

Dylan is a trusted advisor within the service station sector. In the last 24 months Dylan and his team have valued in excess of 600 Service Stations totalling over $6 billion in value. They were also previously appointed as the sole real estate valuation advisors to the largest portfolio transaction in Australia's history. Our service station valuation and advisory services include single asset and portfolio assignments, trust requirements, balance sheet compliance, acquisition and disposal due diligence, financing and refinancing, insurance purposes, feasibility studies and legal / expert witness.

Child Care & Education Valuation Expertise

With long lease terms and favourable rent reviews the Australian child care market has been of growing interest to investors who are motivated by a flight to quality assets.  The child care sector has evolved over the last 20 years to become a structured, transparent segment of the services sector. Dylan and his team are commitmented to delivering the highest level of service by providing expert valuation advice on the child care sector. Utilising extensive market knowledge, the team provides wholly independent, reliable and confidential advice and is dedicated to creating long-term professional relationships with clients.

The Specialisations team provide self-storage, service station, child care and other education valuation assignments for market value for the following purposes:

  • First mortgage security;
  • Financial reporting;
  • Disposal due diligence;
  •  Insurance development;
  •  Feasibility studies; and
  •  Rental assessments and rental determinations.
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Ted Dwyer

Director, Melbourne Metro Sales | Investment Services

Melbourne East

Ted is a Director of the Victorian office and is responsible for the co-management of the Metro Sales team.

Ted assists a diverse range of clients from both the private and the institutional sectors with their property requirements in the commercial sector.

Through his role of extensive relationship management, Ted supports his clients with the sale and purchase mandates of Metro investments and development sites in Melbourne.

Specialising in selling investment and development grade assets in Melbourne City Fringe and Metropolitan markets between $5m and $50m, Ted has a strong client network and is actively promoting commercial assets.

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Frank Oliveri

Director In Charge | Sydney West & Sydney South West

Sydney West

Frank is the Director in Charge of Colliers Sydney West & Sydney South West offices and the National Director, Investment Services.

Frank served 17 years as a councillor on Fairfield City Council, he was also a Director of WSROC (Western Sydney Regional Organisation of Councils) for 4 years and served on the executive
of the Local Government Association of NSW.


Frank was previously appointed as a representative of the Liverpool City Council Independent Hearing and Assessment Panel between 2008 and 2010. Frank was also appointed by the NSW Government to the Board of the Greater Western Sydney Economic Development Board, Small Business Development Corporation, Regional Development Australian (Greater Sydney) and the Board of the Property Services Advisory Council.

Frank showcases extensive experience with business and various Government agencies across NSW at a local, state and federal level.

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Jordan McConnell

Director | Investment Services

Sydney West

Jordan is one of the leading members of the Colliers Parramatta team and has an in-depth knowledge and ability in assessing property and how to unlock potential. With over 10 years’ experience in the commercial, development and valuations industry, Jordan has an eye for detail and is a keen negotiator.

Having completed an Advanced Diploma in Property Valuation and more recently a Masters of Property Development at the University of Technology, Sydney; providing him with an invaluable knowledge of the property industry.

Jordan prides himself on his attention to detail, his enthusiasm to exceed expectations and maintain close client relationships.

 

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Tom O'Driscoll

Director, Brisbane Metro Sales | Investment Services

Brisbane

Tom O’Driscoll is a Director within the Brisbane Investment Services Team and has over 10 years’ experience within the real estate industry.

Tom has operated within Brisbane’s CBD and city fringe office market in both leasing and sales roles on many commercial office projects. Tom’s primary focus is management of the disposal and acquisition of major freehold investments in Brisbane’s CBD near city markets working closely with domestic and international HNWI, syndicators and institutional clients.

Tom’s exposure and experience in Brisbane’s investment sector is proven in his results over $300 million in completed transactions. 

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