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Childcare centres the latest hot property for investors

Demand for childcare centres is swiftly increasing with investors attracted to high leasing rates, long-term tenancy options and reassurance that the industry is an essential service.

Colliers Associate Director, Melbourne Metro Sales, Ben Baines said childcare assets were one of the most highly sought in 2021.

“Nationally this year, in excess of $200 million worth of childcare assets have transacted, with an average yield of 5 per cent, down from 6 per cent average yields in 2019 and 2020,” he said.

“With such low cost of capital, there is a significant weight of funds seeking yield but also seeking security.

“Investors are attracted to the asset class given they generally feature proven national tenants with triple net leases for 10-plus years as well as fixed rental increases.”

Mr Baines said continual government investment into the industry had given investors confidence in the long-term viability of the industry.

Director of Valuations and Advisory Services Dylan Adams said even after lengthy lockdowns in 2021, investor sentiment continued to grow when it came to childcare assets.

“The market is still focussed on alternative asset classes that are needs-based, which ultimately has reflected even more yield compression in the childcare sector on a national level,” he said.

“Post July 2021, the average yield for childcare assets is now five per cent, reflecting 75bps (basis points)  compression from the first half of the year.”

New South Wales

There has been significant growth in childcare centre leasing rates across NSW, Victoria and Queensland, according to Senior Executive Project Leasing Taylor Gray.

“Within the inner Sydney market, for example, leasing rates are at an all-time high, sitting at $6000 per place, per annum,” he said.

“While in Sydney’s South West and North West growth suburbs, childcare centres are demanding rates around $5000 per place, per annum.”

National Director Investment Services Frank Oliveri and Associate Director Investment Services Jordan McConnell have sold three childcare centres in recent months with a combined value of more than $36 million.

“We have really seen shifts in the market over the past 12 months, as a result of COVID-19,” Mr McConnell said.

“Purchasers are shifting to longer-term, safer and more strategic holdings, and childcare has been a focus of that, along with medical and industrial.

“The institutional money has always been there and seen a lot of interest in that (childcare) space, but it was predominantly on a larger scale, portfolio focus-type acquisitions.

“Over the past six months, from what we’ve seen, they’ve now started looking to compete with your mum and dad purchasers and go in and buy one-off assets, just because the demand for building their portfolio around that is so strong.”

Mr McConnell said 4-8 Ramsay Rd, Five Dock, sold for $10.175 million with a lease until October 2025 and a current yield of 5.65 per cent.

This sale sparked two further sales of childcare centres off-market.

He said 173-175 Majors Bay Rd, Concord, sold for $14.5 million, with a lease until 2034 and a current 4.82 per cent yield, while 787 Merrylands Rd, Greystanes, sold for $10.03 million with a lease until May 2031 and current yield of 5 per cent.

“Even 10-year leases are becoming rare,” Mr McConnell said.

“All the new leasing deals we’re doing at the moment are predominantly from 12 years to 15 years for the initial term. 

“We’re even seeing a couple of 20-year initial terms starting to creep into the market.”

Queensland

Colliers Director of Investment Services Brisbane, Tom O’Driscoll, said the investor make-up pursuing childcare centres had shifted, with the entry of Real Estate Investment Trusts (REITs).

“The transition of new REITs and syndicates entering this space and chasing portfolios, with a preference for a minimum $30 million outlay, is beginning to compete with high net wealth individual capital,” Mr O’Driscoll said.

“Traditionally only Charter Hall Social Infrastructure REIT and Arena REIT dominated this area but over the past 12 months we have seen a number of new entrants competing. 

“In Queensland, yields have compressed 50bps for quality new performing centres.”

Victoria

Director Investment Services Melbourne Ted Dwyer said childcare assets were viewed as “recession proof” and an “essential service”, with buyers viewing tenancy default in the low risk category.

“This, coupled with the low interest rate environment will continue to see assets transact at similar yields moving forward,” he said.

“In Victoria childcare transactions have been dominated by local private investors with additional interest from offshore – mainly Hong Kong.

“The 5 per cent yield compression barrier has well and truly been broken with a significant number of non-regional assets now transacting below this level.”

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Kylie Dulhunty

Kylie Dulhunty is the Deputy Editor at Elite Agent.