The long leases and attractive income returns offered by early childcare education centres is continuing to drive investment interest in this growing sector of the commercial property market.
Bayleys’ South Auckland-based investment sales team of Tony Chaudhary, Amy Weng and Janak Darji have been involved in seven childcare property sales across Auckland in the last six weeks at a total value of $19.1 million.
Team leader Tony Chaudhary says the Reserve Bank’s latest unexpectedly large drop in the Official Cash Rate has added further impetus to the already strong investor interest in this sector of the market.
“Most childcare properties are selling at yields of between five and seven percent, depending on their location, child occupancy rate, tenancy profile and remaining lease term. When you compare that with the meagre returns investors are now looking at from bank deposits, it’s not surprising that we have a growing database of potential buyers for these centres – and we anticipate that already large buyer base is only going to get bigger.
“The other big attraction with childcare properties is their very long leases. Most of the recent sales we’ve been involved in had tenants that were in the early stages of leases of between 12 and 15 years.
“Properties with these sort of lease terms are less likely to be exposed to any downturn in the market over the next few years. Many of the leases also have fixed rental increases, in addition to rent reviews to market. This means they provide assured, steady rental growth which will provide most future capital growth given that yields are unlikely to go much lower.”
Recent sales that Chaudhary, Weng and Darji have been involved in include:
• 512sqm premises in Anzac Road, in Browns Bay’s town centre, purpose built in 2014/15 and licensed for 97 children sold for $3,760,000 at a 6.4% yield. Occupied by Choice Education with a 12-year lease until 2030
• 170sqm converted bungalow licensed for 40 children on a 751sqm residential site in Locket Road, Glenfield sold in conjunction with Michael Nees, Bayleys North Shore for $1,690,000 at a 5.32% yield. Educare Kids has a 15-year lease until 2034
• Another North Shore childcare centre licensed for 50 children sold for $3,080,000 at a 4.99% yield. It has a new 12-year lease to an established operator
• SugarTree Lane Preschool centre on Nelson Street in Auckland’s CBD sold for $3,010,000 at a 7.42% yield with Damien Bullick and James Chan, Bayleys Auckland Central. An initial 15-year lease runs until 2033
• Two Choice Kids childcare centres in South Auckland both licensed for 90 children sold to separate purchasers at a combined value of $6,000,000. Located in Roscommon Road, Clendon and Alfriston Road, Manurewa East, each sold at a 7.03% yield on new 15-year leases from March 2018. These are among seven centres occupied by Choice Kids in South Auckland that Chaudhary’s team has sold over the past year
• A centre licensed for 50 children above a small complex of retail shops in Lincoln Road sold for $1,560,000. The relatively short remaining term of less than five years on an initial 10-year lease to Discoveries Educare was reflected in an 8.03% yield
Chaudhary says the early childhood education (ECE) sector is underpinned by strong support from central Government which funds up to 20 hours of ECE a week for children aged three to five.
“Both National and Labour governments have recognised the vital role the ECE sector plays in helping shape our citizens of the future and they would risk a big voter backlash if there was any watering down of current subsidies. In fact, as has been the case with maternity leave provisions, there is more likely to be increasing support for the sector.”
Chaudhary says there has been a proliferation of childcare centres in recent years, particularly in Auckland where this has accompanied substantial population growth, which has created some “growing pains” for the industry. However, he says there are a number of barriers to entry which should help constrain over supply in the longer term.
“Obtaining resource consent for a childcare property is generally more challenging than for say an industrial or office building. Then there are licensing and compliance issues that have to be dealt with. It’s also not as easy to make money in ECE as some people seem to think and we can expect to see some weeding out of weaker players.”
Chaudhary says he and his team will have a variety of centres coming on the market shortly, located in Ellerslie, Herne Bay and Mount Wellington.
“The owners of these properties are looking to make the most of the current high level of unsatisfied demand for childcare centres which is likely to result in strong competition for these offerings.”