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Supply of childcare centres on the rise again

November 7, 2018

An oversupply of childcare places – in pockets of each of the major capital cities – has led to the hammering of share prices of operators. Photo: Supplied

The number of childcare centres is on the rise again, a condition which may suppress the value of childcare operators and properties if demand does not catch up, experts say.

After a short equilibrium late last year following a steep rise in childcare centres since 2014, 92 daycare centres opened in the quarter to September, representing a 7 per cent rise in year-on-year quarterly openings, according to the latest research by Canaccord Genuity.

It also means there has been a 3.36 per cent rise in centres nationally since the start of the year.

An oversupply of childcare places in pockets of each of the major capital cities – has led to the hammering of share prices of operators such as G8 Education, which in August warned that an oversupply wouldn’t resolve until the middle of 2019.

While there are continued short-term risks for companies like G8, Canaccord believes some of the rise in supply this year may be absorbed by increased demand fuelled by the federal government’s funding increase which kicked in in July.

“2019 supply growth will slow. We expect this to be matched with growth in a demand increase on the back of the subsidies, which should mean better operating conditions for the sector next year,” Canaccord head of research Aaron Muller said.

Boosted demand

It was also worth noting that some older centres may close, offsetting some oversupply, he said.

Canaccord will, however, be watching supply numbers in the March quarter next year when it hopes to see boosted demand quelling rising supply.

The crimping of bank funding to childcare operators and developers, which was mainly the reason for the slowdown in centre construction last year, would also likely slow down supply, most experts agree.

One of the biggest childcare asset investors nationally, Folkestone Education Trust, now renamed Charter Hall Education Trust, agrees that while there are pockets of oversupply, the “ripple effect” is low.

“There are still areas of undersupply as well as poor-quality offerings, relative to their competition,” the trust’s chief executive, Nick Anagnostou, said.

“Those areas of oversupply, which we believe are minimal, are characterised by lower levels of the population seeking employment and limited population growth in the 0-5 age group.

“However, we expect that the new funding regime will reduce the barriers to workforce re-entry for the majority and that over the next 12 months we will see parents being able to implement new work arrangements that will see an increase in utilisation.”

The faster pace of growth in the 0-5 age group population also mitigates an oversupply, as does the retreat of bank funding, which played a big part in boosting centre supply initially through large injections of capital, Mr Anagnostou adds.

The participation levels of parents and children are also increasing, with more mothers choosing to go back to work, boosting demand, Arena REIT managing director Bryce Mitchelson said.

But the Australian Childcare Alliance doesn’t think the supply problem will go away quickly.

“We have preliminary data that indicates that while demand is increasing, supply is far outstripping demand in most states and areas,” vice-president Nesha Hutchinson said.

Lack of planning

The problem lies in the lack of planning of childcare places in that some centres are half full while others have waiting lists, Ms Hutchinson said. Childcare centres have a lot of fixed costs such as labour costs, which get passed down to children and parents. A government subsidy merely “bandaids” the costing issue but does not recalibrate supply.

While the economics of childcare operation impact the price or yields of childcare property in some way, it is not the only influencer. Despite an oversupply of centres early last year, yields of sales have reached as low as below 4 per cent.

A 36-place G8 Childcare centre property in Vaucluse in Sydney’s eastern suburbs sold for $4.425 million at a yield of 3.6 per cent in May 2017.

“We now have retail-esque type yields because investors see high underlying land values, no incentives, long-term leases and underlying development potential that matches the population growth thematic,” Mr Anagnostou said.

“Those at sub 5 per cent yields typically represent even higher land values or the potential to assume the business from the tenant.

“Yields are always an outcome of debt cost and rental levels so wherever there is an inadequate premium over the risk-free rate, then you would argue the yield is too sharp.

“However, with childcare, given the influence of underlying land value, what appears too sharp may well not be.”

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