Total Property - Issue 1 2017
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. 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 percent to 96.6 percent, 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 it’s 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 currently 4,596 ECE services in New Zealand, 141 of which were newly licensed in 2016. Nationally, on average 152 services open each year.
Auckland has 1,432 ECE services, 77 of which were licensed last year. The ministry is currently 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.
Building obsolescence in childcare facilities is also low, with most ECE businesses benefiting for the full economic and physical life of their buildings.
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 percent to 7.5 percent. However, higher yields have been recorded for properties where there is a multiple offer negotiated or a prime tenant in place.
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 they have at their disposal could make it increasingly difficult for smaller owner-operators and investors to compete.
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 said.
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