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Booming childcare sector draws investors

author:NZ Herald

Early childhood education is big business in New Zealand and right now it’s a seller’s market as developers and investors seek to capitalise on the surge in demand for places at childcare centres.

John Church, Bayleys’ national director commercial and industrial, says childcare is all the rage in the commercial property market.

“It’s hard to find a commercial property investment class that competes, which is why the number of centres that come onto the market is small. Investors who have experienced their benefits tend to hold onto them.

“The sector is viewed as more secure than other asset classes, because of not only the strength of the leases involved but also New Zealand’s high childcare participation rate.”

Since 2008, the proportion of children enrolled in ECE has risen from 93.6 per cent to 96.6 per cent, while time spent in ECE has reached an average of 21.7 hours a week, up from 13.5 hours in 2000.

Public funding for the sector is reliable and secure, rising from $860 million in 2008 to almost $1.63 billion. The Government committed an extra $396.9 million in last year’s budget to fund care for an extra 14,000 children by 2019/20, and its stated goal is 98 per cent of children attending an early childhood service before starting school.

Population growth is also a key determining factor. Auckland’s 1.5 million population is expected to grow by half a million within the next 10 years, and the reality for many families there will be signing up for childcare months before their child is born.

This will undoubtedly put pressure on existing childcare providers, but the boom presents an opportunity for smart property investors.

There are now 4596 ECE services in New Zealand, 141 of which were newly licensed in 2016. Nationally, on average 152 services open each year.

Auckland has 1432 ECE services, 77 of which were licensed last year. The ministry is assessing 15 Auckland applications that may potentially open early this year.

Katrina Casey, head of sector enablement and support at the Ministry of Education, said: “To meet the increasing demand over the past three years between 70 and 80 new ECE services have opened each year in the Auckland region and we expect this trend to continue.

“Over the past 12 months more ECE services have opened in the south, central and east of Auckland than in the rest of the Auckland region.”

The value of a childcare business is closely tied to the physical property it occupies and the resource consent for childcare use. Most ECE centres are single-tenant, hands-free investments, with the tenant managing all internal and external property-related issues. Once a centre is developed and sold, it tends to operate under the same owners for lengthy periods.

Demand for childcare developments is high and supply is tight, driving prices upwards. Recent sales of freehold properties and ECE businesses have been strong but the rise in property values and set-up costs has seen yields track downwards.

In inner-city Auckland, yields have dropped from 7.5 percent to 5 percent over the past two years while yields in the regions and provinces have gone from historic highs of 9 per cent to 7.5 per cent. However, higher yields have been recorded for properties where there is a multiple offer negotiated or a prime tenant in place.

For those wanting to build from scratch, the rewards can be greater than buying an existing going-concern but the challenges are more substantial. Private entrants may find it difficult to build a viable enterprise in what is proving to be an increasingly competitive marketplace.

Church says larger operators have a significant financial advantage over smaller developers, especially in inner-city and metropolitan areas, where prices are soaring and land is scarce. “The landscape will likely become increasingly competitive as major players drive consolidation within the sector.”

Institutional investors such as Best Start Educare and Evolve Education Group are acquiring privately owned businesses to increase their market share, and the financial firepower at their disposal could make it increasingly difficult for smaller operators and investors to compete.

Best Start Educare, owned by the Wright Family Foundation, a registered charity, is the largest childcare operator in New Zealand, with more than 250 centres, offering more than 15,000 long day care places.

Evolve, with 119 centres across the country operating under several leading brands, including Lollipops Educare, Leaps & Bounds and i.Kids, only entered the market in 2014 but its aggressive acquisition strategy has seen it become a dominant player.

Auckland Kindergarten Association chief executive Tanya Harvey said that Evolve’s spending spree would have an impact on property prices. “In Auckland, when Evolve Education first appeared on the scene and started to buy up centres, the price of childcare businesses skyrocketed, with operators getting on average four to five times their earnings. Prices dropped back a bit once Evolve slowed its pace of acquisitions, but Evolve has now just started buying again, so that’s probably going to over-inflate the market,” she says.

Harvey said that those looking to build in areas where there was an under-supply of ECE centres in Auckland would face tough competition from residential developers. However, the recent increase in government funding had spurred new activity. “It does feel as if more centres are being built and there is momentum in the sector again,” she says.

NZ Herald February 2017 2012