Why Childcare Assets Make Good Property Investments

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As many investors plan to go into commercial real estate investments, office, industrial, and retail asset classes come to mind. This isn’t surprising as these assets form the significant percentage of the commercial real estate investment funds.

Assets such as childcare properties are not often the investors’ priority if one talks of commercial property. But these assets are not a bad investment option. Childcare properties make good real estate investments for the following reasons:

  • Significant Social Services

Undoubtedly, Child Care services are highly-regarded as one type of essential social service. It is tagged as a flourishing industry due to the steady population growth, gradual increase in the female labour participation levels, and the changing Australian lifestyle trends;

  • Increased Investors’ Confidence as attested by:
  1. Accelerated and continued government’s support and funding – the childcare industry is regarded as an essential driver of workforce participation;
  2. Low capital requirements – includes land acquisition and building construction (as well as complying with regulation requirements);
  3. Rising cases of women’s labour participation – the rates for female participation have increased gradually, and this will continue to grow as projected;
  4. Potentials for revisionary re-development – A childcare centre can be re-developed for a housing development site at the end of a childcare centre business, but this would cover zoning adjustments and opportunities for better re-development (meaning higher yields for housing and mixed-use developments);
  5. Greater Yields – Historical statistics prove that the Child Care Industry yielded a 3.7% high revenue growth rate between the years 2015 to 2020, but this same growth rate could decrease to as much as 3.4% for the next five years;
  6. Strong Building Depreciation – since the majority of the childcare buildings are specially-designed, the new ones are likely to be strongly depreciated in terms of tax benefit.
  7. Sound risk profile – usually tenanted by experienced operators who takes out long term leasing agreements with fixed annual growth of around 3%, providing a strong financial security for investors.

Scenario: The Present Childcare Industry

The Department of Education approves different types of childcare services for children under 12 years of age. These approved services, under the present Child Care scheme, receive and process the relevant goverment childcare subsidies and assistance available.

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What are the three types of childcare? 

Family daycare

Family daycare is run in an appoved educator’s home which can operate among these schedules:  all day, occasional, part-time, during school holidays, and before and after school hours. Family daycare centres are usually in regional areas with fewer long daycare centres.

Centre-based daycare

Center-based daycare includes long daycare (LDC), occasional care, pre-schools, and kindergartens in some states. They have an all-day schedule or a part-time one, with some educational programs, too. Centre-based operators often enter into a long term lease agreement or heads of agreement with investors owning real estate assets approved for childcare.

Outside school hours care  (OSHC)

This type of care includes primary school-aged children’s care before or after school during the school term. Vacation care services are also included during school holidays.

Services provided by this type of care are usually located on site, within the public/private/independent school. But they can be located off site school grounds as well, such as in community centres or recreation facilities. OSHC services can be provided by the school, if the school is approved to operate their own OSHC, or an external provider.

The Future of Childcare in the Covid-19’s New Normal Times

True enough, the Covid-19 pandemic has caused significant economic uncertainties and continues to do so, affecting global economic policy changes as a result. However, even with this uncertainty, there is still a notable increase in the Childcare investment industry’s activities, more so in the latter portion of 2020.

The Federal Government and the opposition announced a bi-partisan commitment to long-term financial support for the childcare sector. As a result, despite Covid-19, there is increased competition for high-quality childcare from institutional and private entities. Around the country, 2021 Q2 sales performance was strong  with yields averaging 5.33%

The Australian government provided financial assistance in 2020 with more than $1.5bn to all Childcare operators with the Early Childhood Education and Care Relief Package of free childcare for families.

It’s good that the childcare industry benefits mainly from the political support from all parties as it provides workforce participation to the Australian economy. When Covid-19 happened, the Federal Government gave out assistance packages to the industry as early as April. First, the Early Childhood Education and Care Relief Package provided fee-free childcare for families. Then, from July 13 onwards, the Child Care Subsidy or CCS and Additional Child Care Subsidy or ACCS resumed, with additional measures supporting the sector and its families throughout the transition, including the new Transition Payment for the child care providers and relaxing of the activity test for families.  And the Recovery Package brought the next phase of support for the industry that began in September till the end of January 2021. This package included a 25% recovery payment for Victoria, an extra 15% payment for Outside School Hours Care services in Victoria, and ensuing support if further COVID-19 outbreaks continue throughout the nation in the future. In NSW, a before and after school care voucher program (equivalent to $500) was introduced in 2022 to help reduce the out-of-pocket costs of before and after school care. 

Shifting Family Needs and Preferences

Most child care centres have adapted and responded well to the changes already seen as the world changes fast. However, the pandemic has made large-scale disruptions or threats to the child care industry. Covid-19 may affect one’s working habits (i.e., working from home) and cause changes in employment and family preferences. The shift will ultimately influence attendance rates and childcare participation (i.e., how many hours are needed for care every week).

Effects on Australian Population Growth

Australian population growth is crucial to the child care industry’s future. As the population growth has been impacted negatively by Covid-19, the government strives to catch up with the decline in growth. But despite all this, the question remains: How can the population continue to grow? This concern will undoubtedly pose be a significant risk for the child care industry.

Other Possible Outcomes brought about by the Covid-19: 

  • The anticipated moderate-low growth in short-term rent from low overseas migration rates, rising unemployment cases, indefinite childcare participation, and attendance rates due to Covid 19.
  • As projected by one private operator – 80% up to 90% of operational performance before the pandemic is likely.
  • There will be a probable period of limited investments.
  • There’s a projection for unemployment to heighten, especially post Covid-19.
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Child Care Centre Property Development Requirements

This guide provides you the relevant requirements in identifying the suitable development locations for child care, as well as, in finding the ideal childcare operator to commit to a long term lease of your real estate asset and development.

When investing in child care, land acquisition, design and development, and leasing or selling includes the following specific requirements:

  • Land/Physical Attributes – will the land be suitable for child care (includes land contours, size and allotment configurations, proximity to places of interest where families regularly go to – like schools, parks, and shopping centres;
  • Legal Requirements – this will provide information on the probability of securing approval for town planning (including title restrictions and town planning zoning and overlays included);
  • Economic Factors – evaluating the business feasibility of a particular centre mainly affected by several markets or what they call ‘needs assessments.’ It refers to what a local catchment appears to be and how well the existing operating centres serve or meet the demands of the local community. It also includes the present occupancy of the centres and the requirements for additional centres. The objective is to eventually advise future child care operators of the risks involved in the business and the opportunities for a new centre to be financially viable.

Key takeaways

Child Care is an essential social service that the government is continuing to fund and support due to increased workforce participation.

The following factors could influence the continuous growth of the Child Care Industry:  low capital prerequisites, reasonable risks, and high yields for the Child Care Centres, including demographics and socio-economic factors.

While most of the operators provide 90-100 place centres, the smaller centres have lesser risks.

The Covid-19 implications like unemployment in the next 1-2 years would probably cause some uncertainties in  Child Care Industry. But increased investments into child care real estate will offer more for the child care industry, as landlords are more and more focusing on the overall quality of their assets,  maximizing their asset occupancy and continuing to be competitive.

As the child care sector is still in the early phase of institutionalisation, the private investors will likely remain the dominant buyers. But childcare assets will continue to attract wide-ranging types of investors who want to diversify and maximise their real estate portfolio, which will result to an increased share of more prominent investors in the long run.

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