Child Care Centres in Western Australia – a fool proof investment or a fools investment?

Chris Geers and Epoch Times
Child Care Centres in Western Australia – a fool proof investment or a fools investment?

MMJ Real Estate WA's Managing Director Chris Geers talks Childcare Investments in WA for the Epoch Times...

For the past 12 years I have had direct involvement in the child care market in Perth, Western Australia (WA). Initially as a licensed valuer of child care centres and businesses, and more recently as a real estate agent buying, selling and managing them. Now, as the parent of a two year old who attends child care, I am also a customer.

The child care sector is a growing asset class Australia-wide. As the population grows and more suburbs are created, the need for child care centres expands. From the outside it appears the typically larger Melbourne and Sydney markets are a long way ahead of Perth in accepting child care centres as a stable, attractive, passive property investment option, but as time goes on, I suspect Perth will follow suit with the east coast markets. But is an investment in child care fool-proof or a fool’s investment?

Part of the issue Perth has faced is a severe lack of supply. How does the market become aware of an asset class if supply is limited and therefore purchasing opportunities are infrequently offered to the market? Historically many of the transactions undertaken in WA have been ‘off market’, sold by investor to investor without a large marketing campaign.

Based on research undertaken by MMJ Real Estate, it appears in Melbourne and Sydney child care centres are auctioned off nearly every other weekend. Perth by comparison would be lucky to have witnessed five transactions a year, over the past five to ten years. As you can see a significant discrepancy exists, particularly in the supply of the asset type.

But is all this about to change?

Child care centres in the Perth Metropolitan region are being proposed or under construction in record numbers, generally being constructed by developers for occupation by a combination of local and east coast operators. The main reason for the sudden flood of child care centre activity is building rents. For years building rents were stagnant. Finally after years of limited growth, they are increasing and increasing with a bang. Over the past five to seven years the average building rent for a large, modern, purpose built child care centre has increased by approximately 100%. Increased rents, combined with lower returns accepted by investors (underpinned by record low interest rates) has resulted in higher sale prices, which has made child care centres an attractive option for developers. Increased rents mean developers can now purchase sites that were previously too expensive, making a number of ‘infill’ opportunities attractive.

So what type of return can you expect on a child care centre? In Melbourne and Sydney, securely leased, modern child care centres generally attract returns in the region of 4.5% to 6.0%. The east coast market currently and always will have yields that are at least 1.0% lower than in Perth. The simple logic being: more buyers, less opportunities, a bigger and more developed market, equals lower returns. The most recent transaction in Perth for a large, modern, purpose-built centre was the sale of a Think Education centre in Yanchep, a growing residential location approximately 45 kilometres north of the Perth CBD. That centre sold late 2017 for $4,430,000, showing a 6.48% return.

To my knowledge that sale price and yield was a record high price for a child care centre in WA and a record low yield. The low yield being a reflection of limited stock that is available to purchase and a long term lease backed by a tenant affiliated with an ASX listed operator. Has that sale reset the market in WA? The simple answer is, its too early to tell. Until there is a handful of sales of similar assets in WA, leased to a variety of tenants, the jury is out on what an investor can expect to yield from a securely leased child care centre. One thing is for certain, the days of 8.0% are gone. 6.5% is more likely to be the norm, particularly for centres tenanted by major or large scale operators.

So why on face value do child care centres appear like a sound investment? Let’s look at the facts. Child care centres have long term leases with options, fixed annual rent reviews, all management fees are generally paid by the tenant, and the is tenant normally responsible for all building outgoings - so the return to the owner is a true net return. The key factor here is tenant retention. Child care centres, unlike other asset classes rarely, if ever go vacant. Hence investors generally can expect a long term tenant. Unlike a warehouse, office building or shop, goodwill is associated with the location (i.e. people know where the child care is and good centres build a strong reputation) so occupancy rates are typically strong and the business performs well. Child care centres are generally immune to outside economic conditions. The majority of families have working parents who need care for their children whilst they work. In short the risk of a tenant vacating or relocating is reduced, unlike an office or a warehouse where a tenant may move as their business grows or shrinks based on a better deal that exists in the market.

Almost sounds too good to be true? Let’s play devil’s advocate for a moment. Many traditional property investors understand offices, industrial and retail – what they don’t understand is the child care market, government funding models, occupancy rates and generally (historically anyway) localised tenants. Not to mention a specialised building that in reality (other than demolition) has no alternate use.

In my opinion the strengths of the investment far outweigh the potential negatives, however until there is a string of sales within the market which shows broader support the question will remain: ‘a fool proof investment or a fools investment’.

Interesting in learning more about investing in childcare? Make contact with Chris.