This article is from the Australian Property Journal archive
OVER 2021, Victoria recorded almost twice the capital investment into childcare assets as New South Wales and Queensland, as interest in the sector rebounds from 2020.
According to a recent report by JLL, Victoria has reported around $92 million in childcare asset sales, compared to NSW’s $53 million and Queensland’s $45 million in the first half of the year.
This is despite Victoria having the lowest rate of child enrolled in childcare at 22% compared to Queensland’s 24% and NSW’s 33%.
Victoria also has the lowest ratio of population aged 0-4 compared to the amount of centre-based child care services, with the highest average hourly fee. However the state’s recent population growth over the past half-decade, should see growth in the 0-4 age range outperforming NSW in the next 20-years.
“Victorian child care vendors have been able to capitalise on the resurgence in investment activity in 2021 as a result of strong growth forecasts in the under-four age group over the next two decades. Comparatively higher fees and a relatively lower number of centres per capita in Victoria have provided a competitive edge for Victorian child care assets,” said Mark Stafford, capital markets senior executive at JLL Victoria
Transaction volumes across the sector were particularly high between 2017 and 2017, before falling back to almost 2016 levels upon the onset of COVID-19. Transactions have already surpassed those in the previous year YTD in 2021, with more than $220 million exchanging hands in the first half.
While already in quarter two, initial yields averaging 5.33% are demonstrating continued strength across the national market.
“Childcare assets present attractive lease structures for investors looking for income security. Currently, many operators are seeking longer leases (typically 15-20 years), due to an increased operator focus on investing in quality centre fit outs,” added Stafford.
Such assets were reinforced as a desirable assets for investors looking to diversify as childcare was declared an essential service throughout the pandemic, aligning childcare assets with other resilient assets such as those in convenience retail or healthcare.
“Growing interest from institutional investors has widened the buyer pool and has contributed to strong sales volumes and yield compression across the sector. With the number of new centre openings slowing and fees rising in many locations, previous perceptions of market-wide ‘oversupply’ have softened,” said David Bruce-Clarke, senior director of alternative investments at JLL Australia.
Even with perceptions of oversupply fading, one of the risks to the sector could be the ongoing growth of remote and hybrid working, with more parents/guardians working from home leading to a lowered need for childcare.
“Improvements to centre quality standards in recent years alongside the recently announced extension of the child care subsidy in the 2021/2022 federal budget will continue to strengthen the industry. The child care industry is becoming increasingly recognized as a growing industry benefiting from societal shifts and government incentivization to keep parents in the workforce,” added Bruce-Clare.
Though childcare looks likely to continue to be incorporated into retail and mixed-use assets, likely moderating levels of stand-alone centres and as a result underpinning the value of these assets.
The report highlights that through greater investment into the sector, the emphasis on quality assets will increase, with landlords looking to remain competitive and maintain occupancy.
Already, institutional investors are becoming more and more selective, favouring new assets that are underpinned by blue chip covenants.
“Quality will be key going forward in this competitive market. Institutional owners are likely to become increasingly selective in acquisitions, favouring newer assets supported by ‘blue chip’ operators. Future multi-asset sale-and-leaseback offerings by reputable operators will be highly sought after for major investors looking to make scale purchases,” added Bruce Clarke.
Currently Arena REIT and Charter Hall Social Infrastructure Trust have claimed the title of the largest institutional owners in the sectors. Though Home Consortium’s HealthCo strategy, and Federation Asset Management’s Federation Education REIT have also been emerging as major players over the past 18 months.
“Private investors are likely to remain the dominant buyer cohort while the sector remains in relatively early stages of institutionalisation. However, we anticipate a broad range of investors looking to diversify their real estate holdings with the share of larger investors likely to increase,” concluded Stafford.
