Rising rents, sharp yields ahead as competition for childcare centres heats up

Australia’s childcare centre market is poised for growth in 2023, with increased government investment, growth in the nation’s younger population and expected industry consolidation creating a positive outlook for the asset class, a new report shows.

According to Cushman & Wakefield’s Child’s Play: An Overview of the Australian Childcare Real Estate Investment Market, investment into Childcare centres is expected to continue strongly through 2023 with a number of centres expected to hit the market in the first half of 2023. This followed $520 million in centres traded in 2022, 30% above the pre-covid averages of approximately $400 million.

Cushman & Wakefield Research Manager, Queensland, Jake McKinnon, said: “We’re seeing strong tailwinds across the national market for Childcare centre investment. Investors see favourable fundamentals and can benefit from new subsidies and $4.7 billion in government funding to boost access as demand rises.”

Cushman & Wakefield Head of National Investment Sales, Daniel Cullinane, said: “We’ve seen investment settle well above long-term averages after a bumper year in 2021. However, the drivers are shifting with investors targeting these asset’s recession-proof qualities like stable long-term leases, rather than the hunt for yield that dominated the past few years.”

The research reveals that strong demand for childcare services amid sustained population growth, and competition for quality locations has led to rents rising 47% on average nationally over the last decade.

Demand from high net worth, institutional, and foreign investors has also contributed to ongoing yield compression. Yields for city-based centres continued their long-term decline, falling from 6.8% in 2014 to 4.9% in 2022. For centres located outside of cities, average yields fell from 7.2% in 2014 to 5.3% in 2022.

“In 2022, the majority of assets nationally traded on sub-5% yields, and we’re expecting assets to continue trading on sharper yields. One factor driving the outlook is the consolidation of assets in a fragmented market, as operators seek to meet demand through acquisition and development activity,” McKinnon said.

Goodstart Early Learning has the largest share among the major operators, with 10.3% of the market. G8 Education has expanded rapidly, growing from 17 to 448 centres since 2007, representing 6.4% of the market. In contrast, the research shows that 72% of the market is held by minor or independent operators, creating favourable conditions for M&A activity.