Institutional investments no child’s play

Child care centre transaction volumes increase and yields tighten as institutions dominate the sector.

The child care industry saw record yields and transaction volumes taking place in 2015, with the same pace continuing into this year as the ownership model moves towards private, listed and AREIT portfolios.

According to Colliers International’s latest White Paper ‘Child Care: Australia’s Burgeoning Real Estate Investment Class’, the market’s current participants have grown to comprise listed and AREIT businesses, who have only in more recent times entered the sector as a result of its strong investment fundamentals.

“Child care centre auction sales have increased from 2 in 2008 to 33 in 2015, most of which are tenanted with a 10 year average initial lease term,” said Brian McInally, Associate Director of Child Care Transaction Services at Colliers International.

“We are seeing stronger sales volumes this year with 18 child care centres already transacted in the first half, majority of which have occurred in New South Wales.

“The lowest yield on record at 3.90 per cent occurred in April this year in Chatswood, NSW. However, yields of 5.50 per cent to 7.00 per cent have been achieved consistently over the past year or so. In 2010 a yield of over 14 per cent was obtained which indicates the level of tightening during this period.

“As sales activity increases within this new investment sector, we’re seeing lease terms of 15 to 20 years emerge, along with a further 15 to 20 years in options which are to be exercised 5 years in advance. Currently 52 per cent of the sector is on 10 year lease terms with 35 per cent on 15 years or above,” Mr McInally said.

“New institutional entrants have made a substantial impact on the market and we expect to see further industry consolidation as more listed companies continue in their growth phase and enter their development cycle.

“The lack of development sites in inner city and metro regions has resulted in the two thirds of child care centres this year being built within mixed use developments comprising large format, retail centres, residential complexes and churches / community locations.

“From our involvement in advisory and transactions on a national basis, we have seen the largest level of activity in NSW and see the largest increase in supply of places in 2017 predominantly in NSW and Victoria.”

According to Mr McInally over the next few years as operators consolidate and institutions look for further scale in the industry, the market will see more transactions occur resulting in yields remaining sharp in the short to medium term.

As noted, “Due to lack of land availability in the inner city regions the growth of new centres is likely to be restrained, forcing inner city mixed use developments to incorporate child care centres in order to keep up with the growing demand.” 

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