The Rise of Childcare Centres and Associated Investment Opportunities

Dean Claughton

As the population continues to rise, so does the need for affordable childcare facilities close to home.  This need has led to a significant boom within the childcare industry, and has seen savvy investors buying up childcare facilities and seeing notable financial returns.

In my own practice, I am seeing a number of deals each month relating to childcare centres, with most of these occurring in places where the population is spreading at a significant rate, from down south in the Macarthur region to as far west as Orange and Bathurst.  The need for centres has not seen a decline in years, and continues to show no signs of slowing down.  In this article I take a look at the positives of investing in childcare facilities, as well as a few things to keep an eye out for when considering any potential deals.  

Benefits of owning a childcare facility

  1. Most childcare centre operators are looking for long term leases, as they generally spend a small fortune on their fitouts, and want to ensure that they can remain trading in the building for a long time.  This in turn benefits owners, as they have a long term tenant in place which guarantees their income.
     
  2. It is less likely that the operator will fall into financial trouble, as there is never a shortage in kids going to day care, so their cash flow is consistently quite strong.  If you have a tenant who is making money, they will usually pay their rent on time, which is what every landlord hopes for.
     
  3. As the childcare operator charges parents per child, I have seen some land owners link their rental to the number of approved spots the particular childcare centre is able to offer.  Essentially, this means that as the numbers in the day care centre continue to rise, so does the rent being paid on the centre. 

    I have only seen this on rare occasions, but this is something to keep in mind if you are negotiating to buy a childcare centre.  The only negative aspect to this approach is that if the governing body decides to decrease the number of spots the centre can have, this can result in a drop in rent being paid.
     
  4. A lot of the bigger names in childcare are franchises, which means that childcare operators sit behind the head company (the franchisor) and use its name in the industry to draw parents into the centre.  One benefit of this is that, should the franchisee fall into financial trouble, you may have the franchisor step in and continue the lease as normal.  This is particularly likely where the location of the centre is important to the franchisor, and it feels that it can run the centre at a profit.  
     
  5. In a few transactions I have worked on, clients have bought vacant land (which is correctly zoned), and then constructed the childcare centre from scratch.  After that is completed, a lease is entered into with the operator who then starts running the centre.  In these transactions, it has become quite common for the operator to contribute towards the building costs of the centre.  This can significantly decrease the costs of building the centre for owners, and will thus significantly increase their yield on the property.  

As you can see from the above, as the population continues to rise and more and more children are in need of childcare places, centres will become more attractive to real estate investors.  In my experience, some very favourable terms can be negotiated with operators, including contributions to building costs, so this can only be of benefit to buyers of centres.  

With the population continuing to migrate further west and out of the Sydney CBD, this is where I see the most deals taking place, so it may be worthwhile looking at these outer suburbs, which may not have been considered in the past.  The bigger childcare operators are definitely looking out west, so it makes sense for investors to start looking in the same direction.  

If you have any questions relating to a potential childcare centre investment, please don't hesitate to get in touch with the Commercial Property team here at Coleman Greig Lawyers: