The landscape of childcare today and key trends that will shape its future

24 Feb 2022

By Jane Devereux

Future Cities

In August 2021, I accepted the role of CBRE Victoria’s General Commercial Team Leader for Valuations Advisory Services. I lead our Childcare Valuation Advisory Services in Victoria, a market I’ve specialised in professionally over the last five years and as a mother of two children, it’s something I’m passionate about.

The childcare market is a dynamic and sought-after real estate investment class. Investor appetite in this sector has been stimulated significantly over the past five years and is in line with favourable demographics, the low interest rate environment and government subsidies.

Because investing in childcare real estate demands a detailed understanding of the local demographic and market dynamics, there is much insight to be gained from a valuer’s perspective. For this reason, throughout 2022 I’ll be sharing a quarterly commentary piece on the sector, to help the decision making of investors and owners.

This quarter I’ll be commenting on how the industry is tracking and uncovering key trends.

Childcare As A Pandemic-Proof Industry

The COVID-19 pandemic has put a spotlight on the childcare industry. Federal and state government funding has resulted in uninterrupted service offerings, most recently the acceleration of Federal Child Care Subsidy which commenced in December 2021. The policy benefits families with multiple children, as it aims to stop the cost of childcare doubling, or potentially tripling, reducing barriers for parents to re-enter the workforce after having children.

The impact of this will see increased demand for childcare spaces where it has previously not been financially feasible for a parent to return to work.  

Significant government subsidies for the sector to ensure centres stay open throughout ‘Stay at Home Restrictions’ and any disruptions in 2022 which has shown these assets are essential and somewhat recession proof. Therefore, drawing more interest and demand from investors.  

Long lease terms which generally are on a ten plus ten-year term, coupled with this federal government support to operators, results in a bricks and mortar investment backed by a market-based subsidy model which is a very attractive investment.  

What's Next In Childcare Real Estate, In Victoria And Beyond? 

The Childcare Services industry is anticipated to continue changing over the next five years, as it adapts to a new operating environment following the COVID-19 pandemic. Many families will review their need for formal childcare services due to changed financial circumstances or working patterns.

For example, new working arrangements post-COVID-19 may see families demand more flexible childcare options. Others may re-evaluate the perceived value placed on formal childcare services following the temporary introduction of fee-free childcare as part of the Federal Government's COVID-19 Economic Response plans. The changes to CCS arrangements for parents of multiple children are likely to benefit around 250,000 families, but there is a greater proportion of families who this will not affect.

Furthermore, ongoing challenges for industry participants are anticipated to limit the industry's growth over the next five years, and it will likely lead to further changes in the industry's operating environment. 

Trends In Victoria

Strong Regional Results Due to a population shift not seen since the gold rush

  • Yields for childcare assets have compressed from circa 7% to 5.5% in Victoria’s regions over the past 18 months.
  • Population growth and additional regional grants (Community Childcare Fund) has provided unprecedented investor confidence.
  • Demand for childcare in the regions has sparked development of new centres.
  • Regional Childcare Assets which were previously underrated are now realising their value. 

Metropolitan Middle Ring Achieves a Strong Performance

  • In 2021 Childcare centres located in middle ring suburbs have displayed some of the strongest sales results.
  • Centres in these areas have had good levels of occupancy, as many households rely on dual income to support high median house prices
  • Suburbs such as Glen Huntly, Essendon, and Burwood have achieved yield circa 4.5% to 5.5%, which correlates with their increase in the median house price.
  • We will likely see improved occupancy levels in these locations and we expect to see consistent strong sales results. 

Flexible and occasional childcare services will be most in demand

  • The hybrid working environment is likely to result in a decrease in demand for inner city centres
  • Families now prefer childcare within 2- 3 kms of where they live, not where they work.
  • Footprints of centres are now being examined to see if care at multiple locations under the same brand (sister centres) is a feasible option.
  • Larger operators are re-thinking service offerings from the addition of formal 3 and 4 year old kindergarten in Long Day Care Centres, to more holistic alternatives such as yoga, music and art classes, gardening and sustainable environmental awareness.

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