The metrics of childcare centres continue to stack up for property investors.
Property players are continuing to see opportunities for investment within the state’s childcare sector, which is growing at an even faster rate than the population.
Recent data from Burgess Rawson WA, compiled with the Australian Children’s Education and Care Quality Authority, show there were 940 childcare centres in WA as of March 31 this year.
This reflects a 4.4 per cent increase in the number of centres in the six months to the end of March.
Australian Bureau of Statistics data released in March show the state’s population increased by 2.5 per cent in the 12 months to September 30, 2024.
While this is not a perfect comparison, it paints a picture of the speed at which childcare centres are being developed.
Each of these centres comprises an average of 67 places, which translates to a total of 62,700 places catering for children up to the age of six in WA.
Ownership structure
Burgess Rawson WA research shows that a vast majority, or 64 per cent, of childcare centres in WA are owned by private operators.
This compares with 24 per cent owned by not-for-profit groups and 11.3 per cent owned by publicly listed companies.
The proportion of private investment in WA centres has grown in recent years, partly driven by decisions from listed entities to rebalance their portfolios.
Charter Hall exemplifies this trend, with its recent purchase of a Clinipath Laboratory in Osborne Park funded by the sale of multiple childcare centres.
As Burgess Rawson WA consultant Christopher Carcione explained, the ownership mixes of WA childcare sectors fluctuated regularly.
“There are fairly significant family offices and syndicates, even individuals, buying multiple centres,” he said.
“[Investors] like the length of tenure that’s tied to these assets, they’re very sticky.”
Leases for childcare centres are generally 15 years, like fast food outlets and petrol stations.
But childcare centres have the added benefit of being social infrastructure assets, in that they support a societal need.
Investor view
For Jarra Property commercial director and founder Michael Cameron, the rewarding element of childcare has a definite appeal.
“We’ve developed a lot of [and] invested in a lot of different asset classes [and] compared to developing a fuel station, for example, I get a lot more gratification personally out of developing something which is positive for the community,” Mr Cameron told Business News.
“It’s a space that really does make a difference to the community and labour force participation.”
Jarra has developed more than 30 childcare centres since its inception in 2019 and has paid out more than $50 million to investors.
The Balcatta-based property fund has about $100 million of assets under management, mostly in the childcare space.
Historically, Jarra focused on acquiring land with a view to developing childcare centres and selling them as funds reached their expiry points, of usually about 24 months.
In 2020, Jarra co-founded Bloom Early Education, which represented its shift to an owner-operator model.
Bloom has grown to nine operating centres in WA, with a further six in the pipeline.
On the back of this, the company is expanding the model nationally, via the Early Learning Collective brand.
Its recently launched Jarra Childcare Trust provides exposure to both the real estate and operating childcare businesses within the portfolio.
The $50 million fund will allocate a significant portion of capital to the acquisition, development and management of childcare centres nationally.
Its seed asset is a portfolio of 12 operating centres in WA, Queensland, Victoria and New South Wales.
“Jarra Childcare Trust combines our traditional childcare real estate strategy with a national rollout of the owner-operator model we’ve proven with Bloom,” Mr Cameron said.
He said the fact it was more difficult to make new builds economically feasible played a hand in the decision to move into the operating sphere.
“For businesses like ours, making childcare development projects stack has become increasingly difficult,” he said.
“In WA, land and construction costs have risen more than 50 per cent, valuations have softened by 15 to 25 per cent, and market rent has only increased by around 30 per cent.
“Historically, operators have paid rent equivalent to 12 to 13 per cent of revenue, and this is creeping up.
“It is not sustainable to keep asking for more rent to balance the model.”
He said that ultimately the dual investment model aligned the landlords’ interest with those of the operator and was less sensitive to fluctuations in interest rates.
“[It] allows us to deliver more community impact through a more sustainable investment product, with only a modest allocation to the operating business relative to real estate,” he said.
Mr Cameron also confirmed that the long-term goal was to exit Early Learning Collective via an initial public offering, with a view to selling it to an institutional player.
Transactions
There has been no shortage of transaction activity in the childcare space in recent months, with at least $50 million of sales in the six months to March in WA.
Recent research from Colliers showed there were $105.81 million worth of transactions in WA’s childcare sector in the 12 months to December last year.
And as Burgess Rawson’s Mr Carcione pointed out, the investment market for childcare centres in WA was buoyant given the strong fundamentals associated with the property type.
These include the fact that childcare is an essential service, that it is government-backed, and the long-term leases associated with childcare centres.
“Despite high interest rates, there’s been a continued surge in childcare centre transactions nationwide this year,” Mr Carcione said.
“Commercial real estate insiders reveal that these properties are outshining other asset classes due to longer leases and unyielding demand for childcare services, fuelled by a booming population and enticing government subsidies.
“Most of these transactions are backed by private capital or investor syndicates who advise they are happy to bear higher short-term borrowing costs for solid long-term gains.”
Since October, Jarra Property has sold three centres in Butler, Thornlie and Wandi, for a total of about $17 million.
Nationally, close to $1 billion of childcare centres transacted in 2024.
Late last year, a Nido childcare centre in Maylands attracted a record price of $7.2 million, which was the highest ever childcare transaction recorded in the state.
The property was sold by ASX-listed HMC Capital Limited to local investors, with the deal brokered by Sterling Property and CBRE.
Sterling Property partner Jake Wallman, who specialises in childcare transactions, said at the time the deal reflected the strength of the sector.
“Despite broader economic challenges, assets such as this continue to perform well and attract savvy investors,” Mr Wallman said.
Jarra Property sold Green Leaves in Thornlie for $6.24 million in March.
One of the country’s largest owners of childcare property, Charter Hall, made the call to diversity its portfolio of social infrastructure assets late last year.
In its social infrastructure real estate investment trust results in February, Charter Hall revealed its purchase of a Clinipath Laboratory in Osborne Park for $47 million.
It funded the acquisition with its divestment of 16 childcare assets worth $84 million.
The property fund has 338 childcare centres operating in all states in Australia.
At the time, Charter Hall social infrastructure REIT fund manager Travis Butcher said the Clinipath purchase aligned with the company’s strategy to invest in property that delivered essential community services.
He said the divestment of the 16 childcare assets to fund the acquisition highlighted the “ongoing demand and liquidity for childcare property”.
The childcare centres were sold at 8.6 per cent above their book value.
Reporting impact
A recent ABC Four Corners report exposed failures within Australia’s childcare centres, including increases in safety breaches and allegations of abuse in recent years.
The report linked the increasing volume of private ownership of childcare centres to higher staff turnovers and reduced quality of care.
The coverage has prompted calls for reform of the industry and for increased public funding.
Mr Cameron said this news had not spooked investors but instead could be a positive for the medium-sized operators such as Nido and Green Leaves.
“The types of businesses that we work with are best-class providers in the sector,” he said.
“I view it as quite a positive thing, because what it means is that those type of businesses are going to do better.
“There are a lot of centres that that just aren’t up to scratch, so I think they raise some good points.
“I just think that the idea that [childcare] should be a public service in industry where it is predominantly private … [is] probably not the right approach.”
