Is childcare still a property investors' playground?

Like kids in a major supermarket chain’s processed food aisle, childcare centres have become a favourite toy of excitable property investors.

Over the past decade the sector has experienced strong growth, as individual investors were joined by throngs of funds, syndicates and larger organised investor groups seeking to benefit from a shortage of childcare places, government incentives and subsidies and a seemingly endless source of new customers.

So, is making money from childcare still as easy as taking non-sugar all-natural treats from a toddler?

This commercial property market enjoyed a massive uplift in investment during Covid.

According to the Ray White Group, in 2023, childcare centre transactions across Australia totalled $743 million, representing a 3.4 percent decrease from 2022 results and a 28.9 percent decline from the market peak in 2021, when buyers took advantage of low-cost financing and the trend towards greater portfolio diversification.

The first five months of 2024 have seen just over $200 million in sales, with a strong emphasis on metropolitan assets. Transaction volumes are evenly distributed across NSW, Queensland, and Victoria.

Results have been mixed recently. Average metropolitan yields remain below 5.5 percent, with some sales this year as low as 4.8 percent, rivalling many other more established property asset classes.

But the prospects of the sector were still perceived a positive overall.

Forecasts from the Australian Bureau of Statistics show the number of 0–4-year-olds in Australia is expected to rise to more than 1.7 million by 2046, an increase of 20 per cent on the 1.4 million children in the childcare sector’s most critical demographic recorded in the 2021 Census.

Jake Wallman, Sterling Property Agency Partner, said that while there are risks to consider the combination of demographic trends, government support, and economic factors suggests childcare assets are likely to be a solid investment option for the foreseeable future.

“The Federal Government's role in this unfolding story cannot be understated, and with strong support and funding flowing into the childcare sector, policymakers are clearly signalling their commitment to fostering an environment where both children and the childcare industry can thrive,” he told API Magazine.

“This backing provides a solid foundation for long-term growth and stability in the sector”

With the average sale price across the country remaining below $5 million, childcare centres continue to be an accessible investment option for the growing number of investors looking to expand their portfolios with commercial offerings.

Vanessa Rader, Head of Research, Ray White Group, said investors who chose their locations carefully would do best.

“The gap between metropolitan and regional assets has widened as buyers become more cautious and considerate of occupancy trends.

“The childcare sector's fundamentals remain positive, with data from the Department of Education showing a consistent increase in the number of children attending day care.

“Victoria leads the way with a 2.6 percent increase in the 2023 calendar year, although NSW has the highest number of children in childcare compared to other states.

“Moreover, the average number of hours children spend in childcare continues to rise, currently at 33.3 hours per week per child, up from less than 30 hours in 2019.

“Coupled with a 16 percent increase in the hourly rate paid for childcare over the past two years, now at $12.35, it's clear why investing in childcare is an attractive option.”

A sector outgrowing its clothes

If government childcare subsidies were an actual child, the pencil marking on the wall measuring their rapid growth would be revealing.

Sterling Property’s Childcare Market Insights Report, developed in collaboration with Urbis, shows government childcare subsidies are currently increasing by 7 per cent, year-on-year.

National demand for childcare places is expected to grow at a similar rate.

Australian Government forecasts also show that over the ten years from May 2023 to May 2033, national employment is projected to increase by 1,973,900 people (or 14.2 per cent), with increased workforce participation flowing directly into higher utilisation of childcare facilities.

“The sector's importance to workforce participation and economic growth indicates potential for sustained government backing, which provides a degree of stability for investors,” Mr Wallman said.

“In addition to the demographic trends and government support, investors are also attracted by the long-term leases and the defensive nature what are ‘essential service’ recession proof assets.”

While investing in a childcare centre outright has been a consideration mainly for high-net-worth investors, there are several other strategies retail investors can employ to add exposure to the sector to their portfolios.

“Investors could look for Real Estate Investment Trusts (REITs) that specialise in or include childcare properties, as this allows for exposure to the sector without the responsibilities of direct ownership,” Mr Wallman said.

“Syndicated investments are another option for those unable to purchase entire properties. These investment structures offer an attractive entry point, allowing multiple investors to pool resources and share in the ownership of childcare assets.”