[+] Childcare ‘Deserts’ Spread as Funding Dries Up

Investing in childcare seems like a slam-dunk—stable income streams, huge and ongoing demand, and government support at all levels. But there are factors holding the sector back, leading to what Victoria University’s Mitchell Institute has called ‘childcare deserts’— populated areas where there are more than three children per childcare place. One of the major problems for the sector, according to ASX-listed credit provider Finexia, is declining developer funding, which is tied to uncertainty around major government inquiries, construction costs and workforce issues. “We’ve noticed it for quite a while,” says Finexia managing director Neil Sheather. “It’s a niche area that non-bank fulfill anyway but banks especially have tightened up their exposures and the capital they ordinarily would lend—they don’t have the ability to do it anymore. “Their lending criteria has shifted upwards and that’s a function of their risk appetite.” ▲ About $520-million worth of childcare centres were traded in 2022. At the start of this month, the Australian Competition and Consumer Commission released its interim report for its upcoming Childcare Inquiry , looking at, among other things, the profitability and viability of the sector. For examples, costs for large providers’ centre-based day care grew faster than inflation between 2018 and 2022, up by 27 per cent for the period. Funding and the vagaries of risk Mutual fund Australian Unity launched its Childcare Property Fund last year and now has 15 properties settled at $84.5 million in value. It also bought eight childcare sites, highlighting acquisitive activity in the market over the past year. “Our strategy is really about low risk,” Australian Unity childcare fund manager Mark Delaney says. “We won’t enter into a financial arrangement and take on planning, leasing or construction risk without making sure a developer’s feasibility is robust, or that the builder has financial clout and historic knowledge to deliver in a timely and cost-effective manner.” ▲ Land costs were the second largest overall expense for day care providers, accounting for 15 per cent of total costs, according to the ACCC. However, the situation has become more challenging with construction costs rising an estimated 30 per cent in the past two years. “The difficulties in developers getting finance ... a lot of it isn’t the developers’ fault,” Delaney says. “We have seen construction costs increase so much that if you have a viable feasibility going back three years, the landscape has changed completely.” While some funders may be rightfully cautious, it has also proven a major opportunity for lenders able to take on a little more risk. “We see that gap in the market, that’s really been a big opportunity for us to address that unmet demand, and it’s pivoted our business as a private credit provider—it’s our core business now and I don’t see that changing,” Sheather says. Staff shortages challenging But while investment might depend on a lender’s appetite for risk, all funders are thinking about potential challenges in investing in childcare. ‘The biggest pitfalls in investing in childcare, taking an holistic view, are construction costs as well as staff shortages,” Delaney says. Dr Melissa Tham is a research fellow focusing on childcare at Victoria University’s Mitchell Institute. “It’s one thing to set up childcare centres but if there’s no one to work there, it won’t help families,” she says. “Centres with high turnover are not attractive either and you see it across all sectors of education—workforce retention, especially in rural and remote areas, is a massive issue.” ▲ One of Victoria’s biggest childcare centres went on the market last month and is expected to sell for $19 million. Australian Unity’s Mark Delaney agrees. “Childcare workers are some of the lowest paid worers in the Australian environment and have not benefited from reforms like other lower paid sectors have,” he says. “As a result there is an abundant shortage of suitably qualified workers and the flow-on effect is that operators are unable to operate at full capacity. “ Lack of staff means centres that, for example, were able to take on 140 children, were scaling back actual capacity to 90 places, Delaney says. “That’s because they cannot fulfill the staffing requirements for those larger centres, so they are only partially fulfilling the needs of these catchments.” It has led to those “childcare deserts”—and the regions and less economically developed areas are copping it worse. “Construction costs having gone up universally but especially in regional areas, increasing even above metropolitan areas, so to develop an asset in a regional location to solve that ‘desert’ ... the yields are going to be less than it would be in a metro area,” Delaney says. “While they might be strong economic catchments in their own right, the yield in a catchment like that might be 6.25 per cent. “With construction costs up, the end value is less, so the only give is the land value.” ▲ Labour accounts for 69 per cent of day care costs, according to the latest ACCC report. However, there are still major reasons to invest in childcare, Delaney says. “The benefits of investing in childcare are things like long WALEs and government support. “The government is so protective of the industry because a strong childcare sector allows people with children in daycare and early education to get back into the workforce. And a successful workforce generates tax receipts, higher GDP and a reduced demand on social welfare.” Essential to the provision of childcare services is a stable educator workforce, according to the ACCC report. This year the federal government announced a “vital” $72.4-million investment over five years to support the skills and training of workers in the early childhood education and care sector. Government backing It is this government backing that makes the childcare development sector, similar to the aged-care industry, an attractive space to invest, Delaney says. However, it is not without challenges. “The one thing not spoken about publicly, but what we often get asked, is what if the government reduces support? “We do have government support but we are playing catch-up to the rest of the world. “We are behind the Organisation for Economic Co-operation and Development (OECD) averages on many key criteria, specifically as a percentage of GDP and for affordability, and how people participate in childcare we’re below OECD and international averages. “To me that’s a damning reflection on government support compared to other countries but the government is very protective of childcare and I cannot see the government withdrawing support for this sector, only increasing.” ▲ Sydney fund manager Chavel Capital listed this outer Brisbane childcare centre for $12 million after opening in June 2023. In fact, there are huge movements going on in the world of policy that could prove beneficial, says Tham says. “This year is the year of inquiries,” she says. “At the minute, the federal government provides the funding to the states and territories, who are then responsible for delivering early childhood education and care but how future responsibilities are split is still unclear. “It really is a moveable feast at the moment. You can see the wheels are in motion, it’s looking positive but there’s definitely a few challenges that need to be worked out—‘childcare deserts’ is a massive one.” But this uncertainty in the halls of government is putting pressure on developers and investors to keep delivering, even without a clear view of what the early learning sector will look like in the coming years. This has meant that so far, with so many inquiries on the way, developers are leading the charge. ▲ Over a million Australian households used childcare last year, the ACCC says. “It is definitely developer led,” says Finexia’s Neil Sheather. “The councils in themselves can add additional constraints but it’s developer led on a project-by-project basis.” But developers can’t do it on their own, says Australian Unity’s Mark Delaney and the support needs to continue to balance out the sector to make it feasible. “We’re encouraged by yields in childcare over the past couple of years; with interest rates increasing 400 basis points, it’s a true defensive asset class,” he says. “That’s a strong reflection of that stable income and that unique government support that underpins supply.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Childcare ‘Deserts’ Spread as Funding Dries Up

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