CHILDCARE VOLUMES DOWN, BUT DEMAND STILL VIBRANT ACROSS THE COUNTRY

This year has started off quietly for the childcare sector with limited transaction activity across the country. Despite a slow down in completed transactions early in 2023, there continues to be robust levels of private investor demand, with those assets on the market generating a high volume of enquiry. During 2022 the decline in activity moved inline with the growing interest rate environment which deterred investment demand, notably from smaller private buyers. Volumes, however, still achieved $769 million across the country, albeit a 26.45 per cent decline from the strong 2021 results which achieved over $1 billion.

Childcare remains an attractive asset class despite the changing market fundamentals. The strong government subsidies on offer have ensured that occupancy levels remain elevated and rental growth built into most lease structures is attractive. With changing expectations surrounding yields, volumes are expected to remain low in 2023 as owners hold onto assets. There could, however, be a greater volume of distressed sales, particularly those inexperienced buyers who bought at the peak of the market for secondary type assets (both in quality and location) if continued interest rate movements occur.

While volumes for established assets are down, there has been an uptick in development assets coming to market this year.

Childcare Investment Reducing Inline With Interest Rates

Australian sales volume ($)

A combination of higher financing costs together with elevated building rates has put pressure on some developers/vendors, causing them to reconsider their future development plans. Encouragingly, however, is the ongoing demand to occupy these assets. The strong population growth experienced across the country has resulted in many of these developments able to secure precommitment tenants and leasing activity has seen improvement.

National Childcare Yields Grow

Divide between regional and metro areas increase

Looking ahead, childcare will continue to be an asset in strong demand given strong fundamentals of population growth and high occupancy. The ongoing subsidies offered ensures both vacancy remains limited and daily rates are pressured upwards, the strong leasing enquiry testament to the viability of childcare operations and the ongoing attractiveness for ownership due to its secure income stream. While volumes may be down this year, the growth in yields has not echoed other commercial asset classes given the longer term confidence and ongoing returns for investors.

Investment yields have seen some movement over the last few years, with the divide between metropolitan and regional assets continues to widen, as a flight to quality in location and asset continues by experienced investors. In 2022 we saw average yields for Australian metropolitan assets remain sub 5.00 per cent after falling to 4.32 per cent in 2021, as we moved into 2023 average yields have increased upwards averaging between 5.20 per cent and 6.00 per cent depending on location. For regional assets the growth has been at a more rapid pace, with the current average approaching 7.00 per cent after falling to as low as 6.15 per cent in 2021.

Head of Research