November 2021 Newsletter

Strong Demand for Leaseholds Increases

Major operators for childcare centres are seeking terms of at least 15 years, with options for extension
Quality fit-outs are driving the increase
Demand for childcare continues to rise.
National operators seeking high-quality centres are seeking decades-long childcare lease terms.

Unprecedented demand for stable yields and strong fundamentals underpinning the essential industry have combined to push lease terms to 15 or 20 years, sometimes with options extending for future decades.

Childcare Concepts Founder Phillip Malek said operators scanning the childcare leasing market were focused on quality fitouts and wanted the security of a long rental arrangement.

“New major national operators, as well as smaller players in the industry, know their occupancy is related to the quality of the centre,” he says.

“Operators are prepared to pay competitive rents for the right childcare centre location so they can invest in a great fit-out.”

The childcare centre market for sales and leases has experienced strong demand over the last 12 months, buoyed by its essential industry status and the growing demographic fundamentals in Australia.

The entry of alternative investment trusts and major operators is also increasing entrants to the market.

Childcare centre leases this year include Charter Hall’s Social Infrastructure REIT 20-year lease of 48 centres to operator Goodstart. It includes annual increases.

Goodstart also renegotiated its lease of 87 centres with the Arena REIT for another 25 years.

Industry News

Childcare businesses highly sought after

Strong sales and leasing activity across the childcare market has led to a string of portfolio sales.

Last month Victoria-based Mayfield Childcare raised $8m to purchase the $39.2m holding of 14 centres from Genius Education Holdings in Victoria, Queensland and South Australia.

It reportedly paid 4.9 times expected EDITBA for the 2022 calendar year and entered into a five year incubator partnership for new centres at 4.25 times EBIDTA for the previous quarter.

REITs are also showing interest in childcare. Pengana Capital Fund Manager Amy Pham told Stockhead alternative property investments were currently being overlooked as part of ESG funds.

“Where we focus on is the alternative space, which is anything outside of the traditional retail or industrial assets category,” she told the investment publication.

“These include businesses such as childcare, manufactured home estates, or data centres.

“Going forward with all the trends such as urbanisation, the Internet of Things, ecommerce, aging population; these are going to drive demand and growth in the alternative sector.

“At the moment in the Australian REIT sector, alternative assets only represent 6 per cent whereas in more mature markets like the US and the UK, they make up 60 per cent.”

Home Consortium’s ASX-listed Healthcare and Wellness REIT last month purchased a 13-strong portfolio of city childcare centres and other related businesses within a $200m property buy up.

But it is not only major players buying up in the market. Private investors who are seeking the stable, long-term investment of an essential service business.

Prices have climbed to record levels, pushing yields to sub-5 per cent levels. These sales compare to the average yield of more than 5 per cent (5.33 per cent) from sales across the country in the June quarter of 2021.

2022 is the Year to Sell

The rising property demand was an acknowledgement of the ongoing childcare centre property fundamentals, Childcare Concepts’ Mr Malek said.

He pointed to the most recent Australian Government Childcare in Australia report that showed more than 1.3m children from almost a million families attended an approved centre in the March quarter.

This included almost half (46.7 per cent) of children under five years and one in three (31.7 per cent of children under 12 years.
Funding for these placements totalled more than $2bn (2.07bn).

Mr Malek said the economic significance of the sector meant it enjoyed ongoing government support and in an era of low-interest rates, it represented a robust investment.

“We’re seeing investors who want stable, long-term yields,” he said. “Early learning centres and childcare remain attractive investments because of the government support that underpins the businesses, rising demand from families, and good returns.”

He said Childcare Concepts worked across the industry, with developers, architects and clients to create viable centres that exceeded industry standards.

“We know there will always be demand for centres that are beneficial and highly engaging for children, families and all childcare stakeholders,” he said.

“We assist our clients to negotiate commercially advantageous lease agreements that are in line with industry.”