‘Wall of capital’ to be deployed in booming childcare sector

‘Wall of capital’ to be deployed in booming childcare sector

29 June 2018

The Australian childcare investment market is entering its maturity phase, having grown exponentially over the last five years with heavy transaction volumes in both freehold investments and leasehold assets.

Transactions in childcare centres surged to $404 million last year as the sale price of individual assets rose by 25 per cent.

Childcare centres – as real estate assets – changed hands for an average amount of $4 million, according to an analysis by Peritus Childcare Sales.

The childcare industry has become much more sophisticated with the introduction of the National Quality Framework (NQF) in 2012 which is implemented and overseen by the national body, The Australian Children’s Education and Care Quality Authority (ACECQA). The key purpose of the NQF is to increase the quality of education and care provided by operators.

Major international private equity firms, investment banks and wholesale fund managers are signaling confidence in the sector by either acquiring large portfolios or taking equity positions in the debt stack of operators. Overseas investors are adding downward pressure on yields, as the transparency of the Australian real estate market, the stable political environment, relatively solid GDP growth rates relative to other offshore markets and the ease and transparency of the investment process are being priced in.

The centres in the hot sector traded on an average capitalisation rate of 5.9 per cent, with the assets keenly sought as investors chased a broader exposure than the traditional commercial areas of office, industrial and retail.

Peritus Childcare Sales principal Peter Fanous said there was a “wall of capital not yet deployed” in the sector, with investor demand outweighing supply of childcare centres, reports The Australian. 

“These investors are keen for robust yield and long-term lease expiry profiles,” he said.

“This macro-level trend has been further driven by investors adjusting their return expectations off the back of a lower-for-longer economic growth and inflationary environment, which corresponded to historical low-debt service levels and in turn, cap rate compression,” Mr Fanous said.

He tipped that more deep-pocketed investors would move into the area.

“Major international private equity firms, investment banks and wholesale fund managers are signalling confidence in the sector by either acquiring large portfolios or taking equity positions in the debt stack of operators,” he said.

“Childcare is increasingly being viewed as a form of social infrastructure and a solid investment asset class in its own right with robust downside risk protection,” he said.

childcare centres

The Australian Financial Review reported that in April, the country’s largest owner of childcare centres, the ASX-listed Folkestone Education Trust, swooped on a portfolio of nine Brisbane childcare centres in a $63.2 million sale-and-leaseback deal with private operator Avenues Childcare.