Investors swoop on childcare centres

Investors are snapping up childcare centres in Western Australia, drawn by the yield and security offered by national operators holding long-term leases, according to Ray White senior commercial property adviser Michael Milne.

WA childcare property sales surged over the past 12 months, according to Ray White Commercial’s latest financial year activity review, with the total value of sales transactions more than doubling in 2019-20.

“There’s nothing unattractive about long leases – more recently 20-year leases,” Mr Milne told Business News.

“Most of them have three per cent rental growth year-on-year, (and) have major national covenants and it’s a growth industry.

“There’s also been a swing towards some days in childcare, even if you’re a stay-at-home parent.”

Ray White head of research Vanessa Radar said income derived from childcare facilities was heavily government-subsidised, making it attractive to buyers as a ‘set-and-forget’ asset, backed by strong occupancy levels and, in some locations, waiting lists.

“This was never really considered an asset class, however, more investors have acknowledged it is a stable income stream,” Ms Radar said.

“Also, as new facilities are built, due to growing population over the past few years, this has allowed for more savvy buyers and funds/private syndicates to band together to purchase, making it a far more sophisticated investment option than ever considered before.”

Burgess Rawson director Adam Thomas, who specialises in the healthcare and childcare markets, said WA had experienced exponential growth.

The agency had leased nine early learning centres (792 new places), over the past 12 months.

The recent categorising of childcare as an essential service, he said, had only increased appeal, backed by strong underlying consumer demand.

Centres across the country notched up record attendance numbers in the December 2019 quarter (up 3.6 per cent on the previous year), according to government reports.

As an example, Mr Thomas pointed to the sale of a new Padbury-based childcare centre during COVID to a private Perth investor at auction for $4.6 million on a 6.48 per cent yield.

That centre is anchored by a 20-year lease and two 10-year options to Grassroots Childcare, operated under the NIDO brand by ASX-listed Think Childcare.

“The fact the federal government has bipartisan support for early education and childcare, is quite vital to investors’ confidence,” Mr Thomas told Business News.

The extent of that support was outlined in Burgess Rawson’s Childcare Industry Insights report, released earlier this month.

It highlighted that although occupancy rates fell during the pandemic, childcare centres received 50 per cent of fees based on a February-reference period, plus JobKeeper.

The report predicted overall industry growth over the next five years, increasing 2.2 per cent.

Mr Thomas said investor and service provider appetite had also been underpinned by the WA market experiencing the largest rise in government-approved childcare services in the four years to June 2018.

“The WA market has seen less stock and it was, up until a year or so ago, a less mature market compared with other states, probably as a result of below- average population growth,” he said.

“The resources sector is starting to gain traction again and incomes have risen, it’s got population growth … a lot of those key drivers are helping.”

Growing pains

Perth entrepreneur Rory Vassallo, who heads private investment company Vassallo Corporation, has been involved with the local childcare centre property sector for more than 17 years.

Mr Vassallo, a 40under40 winner, sold his Great Beginnings childcare centre business to ASX-listed G8 Education for $65 million in 2014 but has stayed in the game, developing assets.

Although Mr Vassallo remained tightlipped on the details of his property portfolio, he said he had a steady pipeline of childcare centres, with that asset always front of mind.

“Childcare centres are always first because it’s what I know; I learnt when I sold the childcare businesses that you stick to your knitting,” Mr Vassallo told Business News.

“I like that it can’t be replaced by technology – that was my first attraction when I got into it at the ripe age of 20.

“It’s a high risk – childcare is not easy, it’s hard; you can build the best childcare centre on the wrong street.”

Mr Vassallo said the sector had come a long way since the early 2000s in terms of property quality and regulation funding, but that oversupply was a potential emerging issue.

“In the eastern states, they were for a while there building them next door to each other, which was just madness,” he said.

“We’ve got some pretty sophisticated mechanisms and matrixes that we go by to choose where we put a childcare centre, unfortunately some people don’t use the same methodology.

“Too many in the same area – no one is successful.”

Increasing rental values was seen by Mr Vassallo as another double-edged sword.

“A lot of people are paying a lot more than what the proven metrics are in terms of rent to revenue ratios,” he said.

“For them to be able to pay that there’s a cut somewhere … someone’s missing out and hopefully that’s not on the quality staff or equipment.

“A lot of people are attracted to it … you read too many papers about rental yields, but do due diligence on the operator.

“A childcare business can be no business very quickly with the wrong operator or the wrong staff.

“It’s (still) pretty good, you’ve got to be careful these days – they’re popping up everywhere.”

LJ Hooker Commercial Perth director Brian Neo said while his office had not focused on childcare centres, he acknowledged there was a large appetite for investment-grade assets with secure income.

“This is reflected through low interest rate returns from the big four banks, and also as a result from typical ASX-listed companies cancelling or differing dividend payments,” Mr Neo said.

“Whilst we appreciate the appetite for childcare centres being sold, as well as petrol stations with long-term leases, buyers should also be wary of the underlying land value and improvements they are investing in.

“Although attractive in yield, the investors are typically paying full price for the land and building, leaving very little upside in capital appreciation over the duration of the lease.

“With interest rates sitting where they are, investors need to be wary of any future exit strategy to reclaim any initial capital invested.”