This article is from the Australian Property Journal archive
DAILY childcare rates in NSW are currently rising, leading to decreased affordability for families even with government funding initiatives in place.
According to M3 Property’s NSW Childcare Insight – May 2024, the sector is experiencing significant growth due to a wide range of factors.
Such as ongoing growth in demand for childcare places, rising construction costs, government subsidies, growing wages across the sector and long-term lease “ratchet clauses” preventing rents from moderating.
“Increasing demand for childcare places, along with the rising cost of construction, and the typical lease structures common in the sector, are having a flow-on effect into childcare centre valuations – leading to an increase in daily rates,” said James Ruben, national director of specialised assets at M3 Property.
“Labour force participation rates are forecast to trend upwards over the medium to longer-term, which is expected to contribute to a continued increase in the average number of hours children attend childcare each week. These factors will drive demand for childcare and the development of new childcare centres in some areas.”
Demand is high for childcare assets as Asian investors target alternative real estate investments, with more than $50 million worth of childcare centres have changing hands with yields as low as 4.63%.
While the latest Burgess Rawson national portfolio auction event was headlined by the $7.78 million transaction of the Affinity Education Early Education Centre in Killara, on the Upper North Shore, on a sharp yield of 4.14%.
Ruben noted construction costs are continuing to rise in the currently high inflationary environment, leaving rent to rise to make delivering centres more feasible.
“We expect to see more existing centres undergoing refurbishments and upgrades going forward to compete for customers within their catchments,” added Ruben.
“As these costs grow, the sector continues to be subsidised heavily by the Government, injecting more capital into the market, and placing further upward pressure on daily rates.”
Government subsidies and investments is also impacting valuations, with the federal government’s efforts at cutting out-of-pocket costs benefitting more than a million families.
While the 2024–25 Budget is building on these initiatives, which is expected to result in net savings of $410.7 million over four by strengthening the payment and accuracy of the Child Care Subsidy (CCS) program.
“While childcare subsidies are translating into an increase in wages for childcare workers, over the longer-term this will place upward pressure on operational costs and continued growth in daily rates,” said Brett Baxter, associate director of specialised assets at M3 Property.
“Moreover, more families will need to pay for their own placements as a result of modifications to the CCS program.”
Furthermore, long-term lease structures with “ratchet clauses” have also led to strong rental growth following rent reviews.
“These market factors are creating a perfect storm for the childcare sector, where we are expecting strong growth in daily rates,” concluded Ruben.
