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.