investing in childcare centres

Investing in Childcare Centres

Childcare centres have become a sought after sector by private investors. In this guide we dive into the fundumentals of investing in childcare centres.

Industry Demand

The three key industry drivers for childcare, are: changing attitudes to child care; children of a suitable age; and female employment and participation rates.

1. Changing Attitudes to Childcare

Childcare is enjoying a structural increase in demand that is likely to underwrite increasing returns for the foreseeable future. The introduction of the National Quality Framework reflects the rapidly changing attitude to childcare, which has significantly altered attitudes towards child development, rather than simply serving parental needs. “A growing body of research recognises that early childhood education and care brings a wide range of benefits, for example, better child well-being and learning outcomes as a foundation for lifelong learning; more equitable child outcomes and reduction of poverty; increased intergenerational social mobility; more female labour market participation; increased fertility rates; and better social and economic development for the society at large.”

(Source: OECD – starting Strong III: A quality Toolbox for early childhood Education and Care)

As a result there has there is been a notable difference in the proportion of children 0-4 years using Long Day Care.

To put the potential of this long-term change in demand into perspective, if the propensity ofparents sending their children to childcare increased sufficiently to lift enrolment rates to the OECD average (Figure 22), all other things being equal, Australia would need approximately 3,800 new long day care centres (75 places each). This compares to the current rate build rate of ~150 centres per annum over recent years.

2. Number of Young Australian’s

The number of births in Australia began increasing from 2003, reversing the downtrend since the early 1990s. Australia’s strong economic performance continues to drive immigration and consequently, the number of children aged between 0-4 is growing, as immigrants typically are a younger demographic and have proportionally more young children.

Encouragingly, the growth in childcare industry between 2002 and 2008 occurred despite there being no significant growth in the number of 0-4 year olds in the population. Since then, there has been something of a baby boom and this is likely to drive demand over the coming years.

3. Female Employment and Participation

There has been a steady increase in the number of females in the workforce over the last 30 years, with an average increase in the participation rate of 2.8% pa. This is the result of the following: an increase in the marital age; the decline in manufacturing and the increase in service based industries; more flexible working arrangements; economic motivation of returning to work after becoming parents; the increase in the number of single parent families and better availability of child care services.

Labour force participation by women has remained steady over the past decade, after strong increases during the 1970’s and 1980’s however, the female workforce continues to grow at an annual rate of about 2.0%.

Industry Supply

The recent increases in supply are beginning to moderate to more sustainable levels in line with demand requirements. Calendar year 2017 saw an increase of 318 new LDC centres, an increase of 4.5% and well above historical growth rates. A supply spike occurred in early 2017, with new supply levels moderating to near long term average levels towards the end of 2017. Bank funding for developers and operators continues to tighten, which is placing pressure on new supply.

A ‘catch-up’ of supply was required, given the number of children utilising LDC has increased by 24% since 2010 whereas the number of LDC centres has only increased by 18%. Operators remaining cautious, with rigorous assessments being completed before pre-committing new sites, and there are isolated pockets of over-supply are evident but in small numbers.

More information Department of Education and Training.

Government Funding

Australia has a long history of Government funding to assist families to access early childhood education and child care. The Government first provided financial assistance for child care in 1972 and the Government’s investment in the industry, through the provision of Child Care Benefit and Child Care Rebate, has grown over the past 10 years at a compound growth rate of 11%. Ensuring a sufficient supply of quality, affordable childcare places is one of the key policies for both Australian political parties. The growing demand for childcare has allowed operators to successfully grow revenues and hourly fees at reasonable growth rates.

The Government’s new “Jobs for Families” came into effect on 1 July 2018 providing an additional $3.5 billion in funding to the early learning sector. The scheme is aimed at low to middle income families, with no cap for families earning less than $185,710. Over this amount the subsidy percentage decreases with the cap reducing to nil for families with income over $340,000.

This package will also see high income earners and associated centres worse off, and there is now a requirement will have to work between 8 and 16 hours a fortnight to get 36 hours of subsidy over the same period. Where previously it was enough for both parents need to work or study for 24 hours a fortnight to qualify for childcare subsidies.

Childcare Property

Childcare property ownership is also highly fragmented, with the two major listed landowners holding less than a combined 10% market share, with the majority of other assets owned by individuals.

Childcare property has a number of attractive attributes for investors, including long-term leases (typically 10-15 years), triple net leases, and minimal tenant incentives. This make investing in childcare centres attractive relative other forms of commercial property.

Rents

Rents for freehold Child Care centres are typically struck at 11-13%10 of operator gross income, or rent p/place p.a. However, unlike core commercial markets, many inconsistencies exist. Typically leases are based on an initial 10-15 year term with two five year options, growing at CPI or 2.5%. Incentives are only common with start-up centres, and there has even been evidence of operators contributing to freehold development costs.

Historical evidence of market rental growth is very limited. Certainly, industry feedback has been that since the collapse of ABC Learning Centres, rents have been increasing in line with inflation. More recently, there has been evidence of positive market reviews as demonstrated by the listed players.

Valuations

When it comes to investing in childcare centres, typical centre values comprise 2/3rds freehold value and 1/3rd operating business for a combined freehold-operator value.

Up until recently the ‘rule of thumb’ for freehold cap rates was 8-8.5% for metropolitan areas and 10-11% for regional areas. However, there has been increasing transactional evidence that suggests significant cap rate compression is now underway for childcare centres, and there have been certain recent metropolitan transactions reflecting cap rates below 5.0%.

Find out more

For more information on commercial property in general, read our article  Investing in Commercial Property – The Ultimate Guide.

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