Childcare centre rents hit new highs through pandemic as investors come knocking

Investment demand for childcare centres has risen through the pandemic.

Childcare centre rents are at a record high in some locations after the pandemic highlighted the strength and security of the sector, with investors chasing both city and regional opportunities.

Demand from essential workers for much-needed care options for their children through the early days of the pandemic last year put the resilient nature of the sector on display.

But it was not until the federal government announced its stimulus package in June 2020 that investors began to move in and buy assets, attracted to the long lease terms and overall industry strength.

Market activity quickly picked up with an influx of sales, resulting in overall yield compression and capital growth, with the average yield shifting to 5.75 per cent.

Rents in the inner Sydney market are at a record level, sitting at $6000 per place per annum. Meanwhile, locations in growth suburbs southwest and northwest of the city are commanding rates about $5000 per place per annum.

The flee from the city for a tree or sea change through the pandemic, which caused regional property prices and rents to skyrocket over the past 18 months, also had a flow-on effect to childcare investments.

Typical childcare centre leases range from 15 to 20 years with options for fixed rental increases to guarantee a secure income.

Many of the major childcare operators are looking for sites regionally, particularly in the Central Coast, Hunter Valley and south coast regions in NSW. The particularly high demand has resulted in asking rates up to a starting rate of $3000 to $3500 per place per annum.

Colliers director of valuations and advisory Dylan Adams said the market continued despite the current virus outbreaks, as investor sentiment was not only strong but continued to improve.

“The market is still focused on alternative asset classes that are needs-based, which ultimately has reflected even more yield compression in the childcare sector on a national level,” Mr Adams said.

“Post July, the average yield for childcare assets is now 5 per cent reflecting 75 basis points compression from the first half of 2021.”

Typical childcare centre leases range from 15 to 20 years with options for fixed rental increases to guarantee a secure income.

They also tend to hold triple net lease structures where the tenant pays outgoings.

This has also begun to catch the eye of offshore investors, syndicates and small funds.

Colliers recently sold three off-market childcare centre deals in Sydney with a combined value of more than $36m.

The number of childcare centres operating in Australia has risen 2 per cent over the year from the second quarter of 2020 to now total 16,452, according to Australian Children’s Education & Car Quality Authorities NQF Snapshot.

Colliers director investment services Ted Dwyer said this showed the asset class was “recession proof”.