[+] Investors Will Shake Off Childcare Jitters

Activity in the childcare property and development market has almost ground to a halt this year as the steam goes out of the sector.

Just one childcare centre transacted in April this year, according to CBRE data, a $10-million centre in Narre Warren, Victoria, with a 4.25 per cent yield. This compares to March last year, when five new and 10 old centres changed hands.

Also this year, a centre at Cranbourne North, Victoria, sold with a 5.25 yield in May.

“If the same developers were to purchase a block now, there would be no way they would be able to transact at that yield,” says CBRE’s Jimmy Tat.

Tat says there has been a switch in the market and any demand from investors is for new rather than existing centres.

There are 1.4 million children attending 13,000 centres across Australia, which draw on $40 billion in government childcare subsidies.

“Investors have held back since the RBA lifted the cash rate. Instead of actively bidding for properties, they are sitting back and waiting to see what the market is doing to get a gauge on pricing and yields,” says Tat.

“The demand is still there, but investors are waiting to see if there are any changes to the market.”

It is understood rising construction costs mean some new developments have been paused. Moreover, deals developers locked in with an operator at 2021 or 2020 prices no longer look as attractive, given construction costs have escalated as input costs rise in line with inflation.

▲ This childcare centre in Cranbourne North, Victoria, sold with a 5.25 yield in May.

“A lot of projects are either on hold or developers are having to renegotiate with operators to see if there's a middle ground from which they can proceed with development,” Tat says.

The market, say pundits, is ripe for opportunistic investors to cherry pick assets. CBRE anticipates yields to head towards double figures.

 “There are a lot of cashed-up investors, who are attracted to the government support the childcare sector enjoys,” Tat says.

“It’s a very stable investment. Sooner or later there is going to be a lack of supply because construction costs are rising.

“Developers are postponing their development or renegotiating with operators on rents to make the development feasible.

“But if you compare the childcare sector to shopping centres, where the yield is sub 5 per cent, it is very appealing.”

▲ Australian Unity’s Childcare Property Fund has about 20 centres with a value of about $110 million.

“We’re focusing on geographical diversification. We have stable assets providing income to investors and we've secured opportunities from developers looking for partnerships to fund their pipeline,” says Australian Unity fund manager Mark Delaney.

“We're also assisting developers who may not have equity to deliver and de-risk projects.”

An example from the portfolio is an established centre in Runcorn in Brisbane with 100 per cent occupancy.

“We secured the asset and working with our tenant to refurbish that centre and improve the offering to children as well as increase numbers the centre can offer,” Delaney says.

“As a result, we're improving our assets to give better returns to investors.”

Despite the softening operating environment, Delaney says there is tough competition for childcare centres among acquirers.

“We're selective about assets and geographical spread is just one factor we consider.

“We look at the demand ratio in the catchment and whether the centre is successful in its own right, aside from the property fundamentals.

“The day rates and financials must be strong. One thing we don't want is an over-rented centre that will not be a success when re-letting the centre in five or 10 years.”

Of course, Australian Unity also takes more immediate economic factors such as rising interest rates and inflation into consideration when selecting centres for its portfolio.

“We have to take that into consideration in acquiring assets that will see Australian Unity have a strong return to investors over the short, medium and long-term,” Delaney says.

▲ The appeal of childcare assets to investors is coming back but where new centres are built is crucial.

It’s a sector where for-profit, not-for-profit and government operators make up the market. According to the Australian Children’s Education and Care Quality Authority, 51 per cent of centres are run by the private sector, 33 per cent by not-for-profits and the remainder managed by governments and schools.

“Location is really important. Planning permits are often easy to secure, but not enough thought goes into them,” Community Child Care Association services manager Daniela Kavoukas says.

The association represents community-based education and care services in Victoria.

“I’ve seen childcare services built on busy roundabouts or next to petrol stations on a main road. That's not good for children given the pollution or noise.

“So, there is an oversupply in many places, but there are childcare deserts in places where land is too expensive and it doesn't make sense for big developers to build, because there's not enough kids to make it worth their while.”

A study by the Mitchell Institute and Victoria University, released in March this year, ‘Deserts and oases: How accessible is childcare in Australia?’, found of the 57,000 regions across Australia, 3600 have no childcare facilities.

To this end, the Victorian government has just announced it is building 50 centres across the state.

At a federal level, this year’s budget included a $19.4 million provision to fund up to 20 new childcare centres in rural and regional areas.

Like many sectors, childcare property development is experiencing something of a hiatus. But its return as a desired asset class isn’t far away with attractive fundamentals including government support and demand certain to underscore a healthy long-term development pipeline in the future.

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