Childcare yields tighten despite supply surge

Tuesday 14 November 2017

Written by Nelson Yap, Australian Property Journal

Despite a surge in new supply, childcare centre investment yields continue to tighten as demand for this alternative asset class shows no signs of abating, according to a new report.

Burgess Rawson, which sells approximately 76% of childcare centres in Australia, has released a new report that found since 2013, the average yields have fallen from 7.58% to 5.84% in the year to date.

Although there have been childcare centres that transacted below that level, such as the G8 Education facility in Vaucluse which changed hands for $4.425 million on a 3.57% yield; the Journey Early Learning centre at Indooroopilly for $3.01 million on 5.02%; and the Sparrow Early Learning centre at Keilor Downs for $5.35 million on 5.16%, just to name a few.

Burgess Rawson’s director Billy Holderhead said unlike other property sectors where a surge in supply would normally result in an oversupply and push yields higher, childcare investment yields declined further.

He noted that between 2013 and 2014, supply increased by 550% – yet yields compressed further by 10% from 7.58% to 6.89%.

“The sales history shows that despite increased supply, compression yields and greater price volumes continued. Therefore equilibrium, where demand is met, in our opinion has not been reached.

“We see this trajectory continuing into the foreseeable future,” Holderhead said.

The demand side is not only from investors, it is also from the operators.

Associate director Adam Thomas said the collapse of ABC Learning Centres had minimal impact, with 96% of all ABC centres now assigned to Goodstart, which is a consortium of The Benevolent Society, Mission Australia, the Brotherhood of St Laurence and Social Ventures Australia.

Thomas said childcare centres truly are one of the few remaining “set and forget’’ property investments, with strong similarities to supermarkets in a previous era when leases were more favourable to landlords.

“This shows the core fundamentals are there.

“Even when you look at a time of high stress for the industry such as the collapse of ABC Learning, the actual affect was minimal as new profit and not for profit chains quickly filled the gap,” Thomas said.

Furthermore, over the last five years rents have skyrocketed. According to Burgess Rawson, the rental range is between $1,500 and $6,000 per childcare place, per year, with metropolitan centres sold this year averaging $3,000 per place.

Five years ago, the metro range was approx $2,000 and has now climbed to the high $3,000’s – with some prized sites going up to $6,000. Regionally over the same period, it was approx $900 and has risen to around $2,700.

Burgess Rawson identified some up and coming players in the future including Journey (11 centres), Oz Education (13), Nino (15), Mayfield (17), Little Zac’s (18), Jenny’s (20), Young Academics (25), Big Fat Smile Group (26), Only About Child (29) and Little Learning School (29).

And these players are expected to grow bigger, namely Green Leaves (30), C & K (31), Sparrow (33), Mission Australia (36), Oxanda Australia (40), Think (50), Foundation Early (60).

But they have a lot of catch up on the big five players, who are Goodstart (643 centres – 6.2% share), G8 (500 – 4.8%), Affinity (150+ – 1.4%), KU (140 – 1.3%) and Guardian (99 – 1%).

Currently there are over 10,400 childcare businesses, in a highly fragmented market. For example, within Goodstart’s 643 centres portfolio, approx 320 are owned by private landlords.

Burgess Rawson identified around 85% of the market is held in the hands of smaller chains and mum and dad operations, making it ripe for consolidation,.

Director Ingrid Filmer said the major players hold less than 15% share in the industry and these low levels of concentration make it easier for smaller players to enter.

The sector is suitable for a range of players, big and small, including institutions like Folkestone and Arena, self-managed super funds and mum and dad investors, because Filmer said centre prices start from the entry level of $1 million and go through to $20 million.

Meanwhile Thomas said the major shift in parental requirements and service needs has led to strong competition between centres to ensure that their offering remained first class.

“This new focus on cleanliness and maintenance has ensured that the centres are kept to a very high level compared to many other commercial properties, resulting in increased rental stability and long leases.”

Operators are seeking to position themselves ahead of the pack with wide ranges of experiences now available to complete the overall child early learning transition.

Childcare specialist Michael Vanstone said the future bodes well for the sector with the federal government projected to spend $8.8 billion in 2018/19 and as much as $10 billion by 2020.

The government predicts this investment will return 90,000 parents back to the workforce, which will add $3.1 billion to the economy.

“It is not only increased government payments that have spurred such growth, the urban sprawl of new suburbs create constant demand, together with parents seeking a quality early learning environment.” Vanstone said.

“Nationally, our estimate for new childcare development pipeline over the next two years is $830 million,” Thomas concluded.

Australian Property Journal – view the full article here.
Download the Childcare Report here.