Child’s play no more as investors warned

WHILE the corporatisation of the childcare sector shows no signs of slowing, industry observers warn that the underlying property assets are closely aligned to the performance of the individual businesses.

Industry analysts are already warning investors that a corporate structure won’t protect those with interests in the property or the business from getting burnt.

For investors keen to secure an impressive yield from this type of property, local industry analysts suggest investors target businesses with solid track records.

The licence system that regulates the childcare industry provides a certain level of security for investors.

Herron Todd White senior valuer Mark Houlahan said industry regulation took the form of a State Government licensing system.

“All centres are required to be licensed by the Child Care Services Board, which regulates the number of children a centre can cater for,” Mr Houlahan said.

“They fairly regularly come up and they have a reasonably firm income.

“It can range anywhere from about $300,000 to $800,000.”

The exact figures change depending on the exact size and nature of the business, however yields in the vicinity of 12 per cent are not uncommon.

The location of the centre also plays an important role; in growth areas childcare centres tend to be well supported by the younger demographic.

Equally, the process of urban infill creates pockets of unmet demand in the older, more established suburbs, as new developments allow younger families to move into the area.

“Location is one of the prime factors,” Mr Houlahan said.

“Growth areas such as Wanneroo tend to do well, and to a lesser extent the inner suburbs.”

The licence is the vital element in any valuation of a childcare centre property.

“Really it relates to the licence, and that’s what the valuer is looking at,” Mr Houlahan said.

“Without a licence it’s not worth a brass razoo.”

The structure of property ownership varies from operation to operation, with a spread of both owner-occupiers and rentals.

Some local operations have adopted the lease-back structure, which is a central element of health care group Foundation Healthcare’s business.

For investors interested in this specialised sector there are some opportunities in the market, with the entrance of some new players likely to support further local growth of this market.

“I actually think it’s quite a growth area,” Mr Houlahan said.

“I think they’re quite sought after in good locations.”

Local council plays a role in the distribution of childcare centres as a result of the approval required to develop or build a new childcare centre.

It’s understood the local council in Gosnells recently rejected a proposal for a new centre on the grounds that the area was already well serviced by the existing businesses.

Colleen Coyne, who has worked as an external consultant to independent property research group Property Investment Research, said investment in the childcare sector, including the property that underpinned the businesses, was supported by the licence requirement of operators.

The surge of investment in this sector is explained as the result of the bipartisan support for the childcare benefit.

“Some investors have taken up these opportunities because they see it as an industry that is supported by a government-backed income stream,” Ms Coyne said.

Ms Coyne was involved syndicate reports for childcare property trusts.

Despite the strong growth of this segment Ms Coyne said there were rumblings in the market about the future of this newly corporatised sector.

“Anything as specialised as this people get suspicious about,” she said.

“Anything that’s written up as all so wonderful has got to have some problems. The whole industry has undergone a transformation … from a cottage industry.

“They [the operators] believe they can introduce a lot of economies of scale.”

At the heart off this industry there are the caregivers, whose labour represents the single biggest ongoing cost for all childcare centres.

The analysts concerned about the rapid corporatisation of this sector draw comparisons with the corporate health market, which has suffered a number of major setbacks in the corporatisation of medical practitioners.

The advantages of creating a network of childcare centres are unclear in the mind of one local analyst.

“What are the synergies of having three operations? None. You still need the same number of carers,” he said.

“It’s not a suitable business to be a publicly listed business.

“They might make some savings on insurance costs and public liability and I guess they might say they offer higher standards.

“But I bet it will all end in tears.”

p See page 3

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