In the most recent federal budget, the Albanese government announced it will invest $4.7 billion over four years to make early childhood education and care more affordable.
In June, the NSW government said it would invest $5 billion over a decade to expand access to childcare across NSW, around the same time Victoria announced a $9 billion investment.
Investment from governments at all levels are pouring into childcare to make it more accessible and affordable, and this strong pipeline has created a hotbed of investor activity in childcare assets.
The two big ASX players, ARENA REIT and Charter Hall own just 7.5 per cent of the market, with childcare assets typically being own by high-net-worth individuals.
As an extension of its strong focus on social infrastructure, Australian Unity opened a childcare fund towards the end of last year, with 11 properties, valued at $60.5 million alongside a further 6 in due diligence.
Mark Delaney, Fund Manager – Australian Unity Childcare Property Fund said interest from the wealth fund manager followed on from the group’s catch cry of ‘making people thrive’ and how it can empower women to go back to the workforce.
“Childcare is often viewed as an alternative asset class, but when you look at childcare on scale, it really has infrastructure like qualities,” he said.
“This is why the government are so focused childcare because it’s a real driver for the economy.”
In order to support labour force participation (particularly female workforce participation), generate tax revenue, lessen reliance on welfare, and significantly support the nation’s educational goals, the sector has been receiving bipartisan government support. This support has helped shore up investor confidence.
Australian Unity is currently in its third capital raise for the childcare fund, which will close on 30 November 2022. Capital raised from will add to the existing $52 million it has raised, earmarked to fund future acquisitions.
Mr Delaney said with economic turbulence over the last couple of years, the fund has been able to stress test the fundamentals of the asset class, which has proven to be a resilient, defensive asset.
“What you’ve seen over the last nine months, is despite interest rates increasing by circa 250 basis points, the national average, including Metro, regional, and all A, B, C, and D asset quality, has remained stable,” he said.
“We’re seeing a flight to a defensive asset class from the wider economy because of the support that childcare offers, typically long weighted average lease expiries (WALEs), 15 years at fixed annual increases, and the unique government support that other sectors don’t have.”
According to Ray White, total sales of childcare assets grew 99.96 per cent through 2021 to $279.77 million, with the average price in regional NSW sitting at $2.3 million, while metroplitan assets secured $5.2 million on average.
The agency said in the first few months of 2022, only $25 million in assets changed hands.
CBRE has noted that investors may be looking to secure completed projects, rather than deal with supply chain issues and rising construction costs. With off-the-plan facilities also proving popular.
For-profit, non-profit, and government businesses all compete in this market. The Australian Children’s Education and Care Quality Authority estimates that 51 per cent of centres are run by the private sector, 33 per cent by not-for-profit organisations, and the remaining 20 per cent are run by governments and educational institutions.
About nine million Australians, 35 per cent of the population, live in neighbourhoods the Mitchell Institute classify as a childcare desert. A childcare desert is a populated area where there are more than three children per childcare place, or less than 0.333 places per child aged four or under.
About 1.1 million Australians live in regional and remote areas where there is no childcare available at all.
Mitchell Insitute said childcare deserts are an issue in metropolitan regions as well, with more than 5.3 million Australian’s living in childcare deserts.
In its first full year of operation Australian Unity’s childcare fund witnessed a return of 4.15 per cent to investors with an average WALE of 14.3 years, 100 per cent occupancy and the lowest annual review rental increase of 3 per cent per annum.
In a quarterly update, Australian Unity said it expects yields within the childcare sector to remain steady in the 4.5-5.5 per cent range for premium assets.
Australian Unity said recent lease agreements around Victoria, rates have increased from the 2021 Victorian average of $3,265 per place to an average of $3,620 per place across a variety of regional, urban expansion, and inner-city locales.
CBRE has said yields for childcare assets have compressed from circa 7 per cent to 5.5 per cent in Victoria’s regions over the past 18 months, similar to suburbs such as Burwood and Essendon.