Article | Intelligent Investment
Uncovering key factors driving investment in early learning environments
Unlike many other sectors, education still benefits from parents’ inclination to seek the best care and learning for their children, even in the face of higher interest rates and living costs.
May 27, 2024
Learn about our healthcare services
Click Here
Throughout 2024, CBRE’s Australian Healthcare & Social Infrastructure team has transacted seven childcare centres across the country, setting the tone for future demand and yield compressions while most other markets have slowed.
The social infrastructure investment market has experienced only minor yield corrections compared to other sectors of the commercial property market. Despite this, there have been shifts of 50-100 basis points, depending on whether the locations are regional or metropolitan. Whilst predicting the exact ‘bottom of the market’ is challenging, many experts believe it occurred in late 2023.
CBRE’s Pacific head of research, Sameer Chopra said that unlike many other sectors, education still benefits from parents’ inclination to seek the best care and learning for their children, even in the face of higher interest rates and living costs.
It’s not just improved economic forecasts driving this demand, it’s also scarcity of new supply and increased research depth and interpretation from private investors.
“Another significant trend is the rising cost of construction. Replacement costs have surged by nearly 40%, which will limit new supply and exert upward pressure on property values across most real estate sectors,” Mr Chopra added.
CBRE’s Marcello Caspani-Muto said that further yield compression will happen as supply decreases.
“This process will likely be catalysed by an improved interest rate environment, whenever it materialises. Although institutional capital may not currently be positioned to buy at competitive levels in the short term, the volume of capital among private investors and syndicates exceeds common perception,” Mr Caspani-Muto said.
“Based on data from our research and active leasing activity, it’s evident that the supply pipeline for new childcare centres is declining significantly (similar to other asset classes). While investor demand remains steady, the diminishing supply will likely lead to yield compression in the future.”
It is unlikely that investors will seek yields of 6% or lower in the modern centres space within metropolitan locations across Australia, however, competitive buy-side options still exist within reach of these levels.
CBRE’s Sandro Peluso added, "Investors must consider more than just surface-level yields. Factors such as depreciation, replacement cost, and a comparison of returns between bank savings and investing in childcare centres are crucial. Our team collaborates with buyers and their accountants to navigate these considerations successfully. Assuming a standard childcare Loan-to-Value Ratio (LVR) of 60% (with suitable Interest Coverage Ratio), we observe benchmark returns 15-30% higher on investors’ capital for newly built centres once depreciation is factored in.
Many buyers express interest in positive cash flow investments due to current debt costs. Purchasing high-quality new centres within traditional borrowing parameters (yields of 5-5.75%) typically results in positive cash flow assets. As interest rates eventually correct, these positive returns will become even more pronounced, even without capital growth benefits."
CBRE’s 2024 Childcare Centre Sales
CBRE’s Active and Forthcoming Childcare Opportunities
The social infrastructure investment market has experienced only minor yield corrections compared to other sectors of the commercial property market. Despite this, there have been shifts of 50-100 basis points, depending on whether the locations are regional or metropolitan. Whilst predicting the exact ‘bottom of the market’ is challenging, many experts believe it occurred in late 2023.
CBRE’s Pacific head of research, Sameer Chopra said that unlike many other sectors, education still benefits from parents’ inclination to seek the best care and learning for their children, even in the face of higher interest rates and living costs.
It’s not just improved economic forecasts driving this demand, it’s also scarcity of new supply and increased research depth and interpretation from private investors.
“Another significant trend is the rising cost of construction. Replacement costs have surged by nearly 40%, which will limit new supply and exert upward pressure on property values across most real estate sectors,” Mr Chopra added.
CBRE’s Marcello Caspani-Muto said that further yield compression will happen as supply decreases.
“This process will likely be catalysed by an improved interest rate environment, whenever it materialises. Although institutional capital may not currently be positioned to buy at competitive levels in the short term, the volume of capital among private investors and syndicates exceeds common perception,” Mr Caspani-Muto said.
“Based on data from our research and active leasing activity, it’s evident that the supply pipeline for new childcare centres is declining significantly (similar to other asset classes). While investor demand remains steady, the diminishing supply will likely lead to yield compression in the future.”
It is unlikely that investors will seek yields of 6% or lower in the modern centres space within metropolitan locations across Australia, however, competitive buy-side options still exist within reach of these levels.
CBRE’s Sandro Peluso added, "Investors must consider more than just surface-level yields. Factors such as depreciation, replacement cost, and a comparison of returns between bank savings and investing in childcare centres are crucial. Our team collaborates with buyers and their accountants to navigate these considerations successfully. Assuming a standard childcare Loan-to-Value Ratio (LVR) of 60% (with suitable Interest Coverage Ratio), we observe benchmark returns 15-30% higher on investors’ capital for newly built centres once depreciation is factored in.
Many buyers express interest in positive cash flow investments due to current debt costs. Purchasing high-quality new centres within traditional borrowing parameters (yields of 5-5.75%) typically results in positive cash flow assets. As interest rates eventually correct, these positive returns will become even more pronounced, even without capital growth benefits."
CBRE’s 2024 Childcare Centre Sales
CBRE’s Active and Forthcoming Childcare Opportunities
Get in Touch
Sandro Peluso
Director, Healthcare & Social Infrastructure, Capital Markets, Australia
Marcello Caspani-Muto
Associate Director, Healthcare & Social Infrastructure, Capital Markets, Australia
Jimmy Tat
Director, Healthcare & Social Infrastructure, Capital Markets, Australia
