More than 200 people tuned in to RWCs October Between the Lines Live webinar where the panel of experts took a deep dive into the childcare sector from the perspective of an agent, financier, and operator.
Ray White head of research Vanessa Rader hosted the webinar and was joined by RWC Western Sydney associate director Jai Sethi, RW Capital executive director Ben Kirby, Oxanda Education managing director Adrian Fonseca.
Mr Sethi said while the childcare sector had been around for more than a decade, it has really piqued investors’ interest in the last five years.
“It has gotten a lot of attention in the last four to five years due to the government subsidies. This has intrigued a lot of people,” he said.
“During covid we saw it was one of the safest investments as it was still operating, so people saw the security and were paying premiums.
“The prices we’re seeing are still quite stable. Since Covid, interest rates have doubled but we haven't seen the adjustment of the cap rate, people are still paying 5-5.5 per cent. “People buying these assets are looking for a good return, but they have a stronger demand for that security.”
RW Capital is a lender of equity and debt capital, and Mr Kirby said the business had deployed a lot of equity into childcare developments across NSW and Queensland.
“Make sure you're getting your visibility right in terms of construction. Rents have also increased due to the costs of construction,” he said.
“Development in the industry is well supported by the banks. The cost of equity has certainly gone up in terms of that development piece, RW Capital is a bit more selective at the moment.
“But there is no shortage of buyers once you get those developments complete. We’ve sold a number of them with pretty tight cap rates.”
Mr Fonseca said Oxanda Education was a medium-sized childcare operator across NSW, Victoria, and Queensland.
He said Oxanda Education’s business model was to focus on growth corridors popular with young families.
“Historically the business model was based on being nearby a primary school, but we saw a shift where we think the better location is in a commercial precinct adjacent to a supermarket or a gym, or a neighbourhood centre,” Mr Fonseca said.
“We’ve also found it's often better to have a childcare centre in a commercial area instead of a residential area as people often don't want to live next to a childcare centre, but they’re okay with a 5-10 minute drive.
“Growth corridors are where the demand side is and where we like to be. When you move closer to central high-income areas there are less young families.”
All three childcare sector experts said the outlook for the sector was positive, despite some challenges.
“Australia is a growing country and there is a massive demand for childcare needs,” Mr Sethi said.
“The investment side and leasing side will be strong due to the three Ses - security, stability, and subsidies.
“However, the prices have changed and people have to do their research into where they’re doing a development application, location is important.”
Mr Fonseca said subsidies were attractive to investors, but more completed product was needed.
“We have bipartisan support for the sector which is a strong starting point, subsidies will always increase by CPI at least,” he said.
“Subsidies will continue, we just need to address some of the supply issues in terms of centres, and the staffing side.
“Large regional locations are good, especially places like Newcastle and Geelong.
“As an operator, demand is good. Hopefully interest rates stabilise and abate, if investors can front the upfront piece, the rentals will continue to grow.
“Completed product is king.”
Mr Kirby agreed that demand outweighed supply for finished product.
“Most investment will continue to go to metro areas,” Mr Kirby said.
“Supply of new product will remain subdued due to the constraints in construction. We believe that will remain tough for at least 12 months.
“There will be some challenges but it will remain an in-demand asset class.”
