Why childcare is the next class asset to watch

The Early Childhood Development and Care (ECDC) industry has been an asset class with strong returns for many years, however recently the new government childcare rebates, coupled with a number of other well-timed market changes, have seen this particular asset class truly become one to watch for astute investors.

In a recent white paper Child Care: Australia’s Burgeoning Real Estate Investment Class by Colliers International, it identified an 800 per cent increase in the number of sales of child care centres from 2008 to 2016, with the highest volume of activity concentrated across the east coast.

The growth of the industry is supported by several key factors that effectively de-risk the class asset and reinforce what we have believed for some time – that childcare is one of the more attractive investment asset classes of 2017 for developers and investors alike.

HISTORY OF STRONG YIELDS

The childcare industry has historically recorded higher yields and stronger transaction volumes than its counterparts in the office, retail and industrial sectors. For example, in September 2010 the highest yield of the past decade was recorded at 14 per cent garnered.

The spate of new competition amongst childcare operators and investors has seen a sharpening of transaction yields and as a result, the industry is showing clear signs of maturity as the performance gap closes comparative to other sectors.

As the market matures industry yields have consolidated. According to Julian Heatherich, Savills Australia Director, CBD & Metro Sales yields have been peaking at the 6 to 7 per cent range over the past 12 to 18 months

LONG-TERM TENANCY AGREEMENTS

Unlike other commercial asset classes where tenancy agreements tend to be an average of ten years, the ECDC industry leases are normally 15 to 20 years, providing more certainty and stability for landlords and investors.

The stability of these tenancy agreements are amplified by the triple net-lease tenancy model used throughout the market. Under this agreement, operators are responsible for paying the building property taxes, insurance and maintenance which, under most other lease types, would fall to the landlord.

Thus the nature of these leasing agreements makes childcare a popular vehicle for investors as it creates a steady low-risk income with some built in capital protection.

GOVERNMENT SUPPORT

In May this year, the federal budget outlined significant changes to the childcare rebate system and will soon offer subsidies relative to income - skewed to favour lower income earners.

To take effect on 1 July 2018, the new childcare packages will provide families earning less than $65,000 per annum with an 85 per cent rebate, tapering off to 20 per cent for households earning $250,000 - $340,000.

The government objective is to incentivise families to return to work by increasing accessibility to childcare services, which may have been, until now, out of reach. A secondary objective is to invest in ECDC industry and positively impact yields, which will attract investment and generate competition and enforce pressure for higher quality of child care services nationwide.

Government support will ensure stability in demand for the industry, presenting astute investors with yet another argument for childcare as a low-risk, low-term investment opportunity.

STEADY DEMAND

Location is key to a childcare centre’s success. Until now city and metro-based centres were sitting at an occupancy rate exceeding 80 per cent due to the density of population in their catchment areas. However, regional area attendance is fluctuating between 50 to 70 per cent.

According to a report released in 2017 by Early Childhood Development Agency (ECDA) since 2013 there has been a 39 per cent increase in the number of children enrolled in child care facilities and only 26 per cent increase in the number of child care centres nationwide.

The increased demand is underpinned be steady population growth as well as the female workforce participation rates, which have been on a consistent upturn since the 1980s.

Considering the changes to government support, the low risk environment for this asset class is assured. The legislative changes ensure resilience of consumer income in an economic downturn for this asset. and reinforces the childcare freehold as a protected asset class.

Furthermore, these key economic features hint at the potential growth suburbs for the child care services nationwide presenting an array of investment opportunities across Australia.

When the above is considered, the case for child care as an asset class becomes compelling. There are few asset classes that are comparable in terms of being able to offer secure, long-dated income profile that is underpinned by explicit government support. This asset is future-proofed with a long history of good performance and underlying social trends that continue to support its strength.

Backed by a sound track record and with more potential to be unlocked come 1 July 2018, developers would do well to factor this strength into their portfolios for the years ahead.