[+] Childcare’s Lure Grows as Residential Loses Lustre

As economic conditions, labour and material costs, and housing affordability woes make it increasingly hard to get residential projects to stack up, developers are looking elsewhere for a glimmer of hope. According to CBRE Australian healthcare and social infrastructure director Jimmy Tat, childcare offers just such hope. There is a substantial number of developers who bought a site for a residential project, Tat says, and have realised it is not going to stack up. “So a lot of them are then turned into childcare as an alternative,” he says. Growing returns prove a lure Indeed, childcare is extremely lucrative. During the past 12 months, Tat has seen prices and rents go up markedly. “In the past 12 months there has been about a 5 to 10 per cent increase [in rents] in metro areas,” Tat says. “I recently had a look at one where, about 18 months ago, it was returning around $4100 per place [child] per year. “I just received an offer last week for it for $5000 per place. So that will be around a 20 per cent increase over 18 months.” And, as a price per childcare place, depending on the number of places a centre provides, the rental revenue return to investors quickly adds up. Chris Kombi, a director at Melboune real estate agency Fitzroys, agrees. “Investors continue to pursue Australian commercial real estate opportunities leased to essential services,” he says. It means that on newly built projects, even after accounting for depreciation, investors can get a 15 to 30 per cent return on their initial investment. So who are these investors? According to Tat, many are not childcare operators themselves. “Most childcare operators rent—it’s too expensive for them to own,” Tat says. And, at least for now, Tat says, there is a relatively event split between domestic and international investors. “Of the last few we did in 2023, about 45 per cent of our sales were to Chinese investors,” Tat says. “And this year, it’s probably 50/50. It’s only a small amount at the moment—the figure for the first quarter was 50 sales.” ▲ One of Victoria’s largest childcare centres, at Nunwading, changed hands this year for $12.8 million. Top of the list for international investors are individual China-based investors rather than companies. “I’m seeing is a lot of Chinese investors who have previously looked at office or looked at retail ... they have expanded their options and included childcare,” Tat says. With international student numbers increasing, their parents are not only buying them houses or flats to live in, but also investing in safe, low-risk assets in their names. “A lot of those families would say, ‘My son’s only here for three, four or five years so I’m going to buy a house for them’,” Tat says. “But then when they buy the house, and then the son or daughter is here for a while, they get used to the area and they say, ‘I’ve got money and I don’t want to leave my money in China or wherever it might be—I want to buy commercial real estate for my child, which will be safe’.” And as Australia is seen as a safe, low-risk market to invest in, individual investors are holding on to those childcare assets. International investors also come from the Asia Pacific region, where owning an range of properties as an individual is seen as aspirational rather than necessarily more within the purview of a company. “Australia is one of the countries in the world, along with a few others, that is pretty easy to invest in for international capital,” Tat says. ▲ This centre in Cranbourne North, Victoria, sold on a 5.25 per cent yield in 2022. Upsides for developers The high demand and prices, and the keenness of investors locally and globally, is making it an easy decision for developers to be part of the rush to the sector. Current conditions for construction costs and land prices are also having an effect. And it is not only new builds caught up in the wave of interest—operators don’t want to take on the cost of building new centres so are looking to refurbish existing centres as a cheaper option. “The land is so expensive to build in those areas and the construction cost is high,” Tat says. “The next best option for operators is to get an existing centre, where they pay a little bit of money to refurbish the place, but they’re getting an open centre at a much cheaper cost.” And that works out well for the owners as they get an asset that has increased in value and an increase on the previous market rent. Most of those currently selling childcare centres are owners who have owned the properties for some time and want to recycle capital or developers who are selling newly built projects. Some of the latest transactions have included a Brighton centre for nearly $18 million , and a 154-place centre at 86 Springvale Road, Nunawading, for $12.8 million. Another 93-place centre at 263-265 Centre Road, Bentleigh was sold for more than $6.7 million this month [April, 2024]. Meanwhile, four Sydney-based centres and three in regional NSW are being sold as part of the Affinity Education Groups childcare portfolio with one major tenant. They are expected to fetch in excess of $60 million. Despite just 50 transactions so far for the year, Tat and others have noticed increased interest in the sector. “Everyone is jumping in, everyone is trying to do it,” Tat says of investors and developers. “And it has saturated the market a little bit. “But again, if you understand the basic fundamentals, it’s the way to go.” You are currently experiencing The Urban Developer Plus (TUD+), our premium membership for property professionals. Click here to learn more.

[+] Childcare’s Lure Grows as Residential Loses Lustre

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