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Childcare Centre Rental Valuation & Key Drivers
Assessment of Childcare Centre Rental Values
Joshua Margeson, an experienced property valuer, discusses the most commonly used valuation methodologies for valuing childcare centre rentals and analyses the key drivers of growth in this area.
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The Australian childcare centre industry has developed dramatically since 1992, when centres first became eligible for Federal Government means-tested child care subsidies. Since then, there have been significant increases in the development of larger, purpose-built centres providing modern fully serviced facilities, and the growth of smaller, owneroperated converted residential dwellings. Current trends have indicated that professionally operated centres with product ‘branding’ have become more dominant within the sector. This is evidenced by the market share of ABC Learning, which was the most eminent company involved in childcare centres throughout Australia prior to its collapse. Social changes such as the increasing number of single working parents and dual income families have fed the industry alongside the commencement of Commonwealth funding. In terms of performance, the child care industry has had a history of significant falls followed by massive gains (largely produced by Government policy) over the last 10 to 15 years. The Main Types of Childcare Centre Assets In Australia, the child care industry consists of several distinct classes of child care services. Long day care centres (LDC Centres) usually cater for children under school age, in premises which are purpose-built or adapted for child care. LDC centres are most commonly operated by private operators, local councils, community organisations, employers and non-profit organisations. Since the Federal Government extended the availability of fee subsidies to families using ‘for-profit’ child care centres in 1990, the private LDC Centre market has grown substantially. Fees charged at LDC Centres are not subject to Government regulation, and are influenced by a variety of factors including movements in award wages, service charging practices, changes to State regulations and increases in overheads such as rates, utilities and insurance.
Government Regulation of
Centres & Licensing The State and Territory Government regulates the operation of childcare centres via the issuing of licenses to the operators of centre within their jurisdiction. Local governments are responsible for planning controls such as development approvals. The childcare industry is heavily regulated due to the level of Government funding provided to the industry and the importance of maintaining standards. In July 2000, the Federal Government introduced the Child Care Benefit (CCB). The CCB replaced both the Childcare Assistance and the Childcare Cash Rebate
and allows for varying levels of benefit, largely dependent on family income levels, for up to 50 hours of approved care per week. To improve affordability, the Government introduced the Child Care Tax Rebate (CCTR) in 2005, which is a non-refundable tax offset that covers 30% of out-of-pocket childcare expenses, which a maximum of up to $4,000 per child. On 1 July 2018, the CCS replaced both the CCB and CCR.
Industry Performance & Fee Increases Over the last 10 years, on a national basis, the rise in the price of childcare has significantly increased over headline inflation. The price of childcare has increased at just under 7.00% p.a. whilst inflation averaged below 3.00% p.a. over the last two years. It is estimated that child care expenses have risen by over 107% over the last six years since 2015. Enquiries with child care centre brokers indicate that the market remains steady, which can be largely attributed to the CCS program and subsequent increased demand from parents. Before COVID-19, good quality, wellrun child care centres were at 65% to 90% occupancy levels in some locations throughout the Sydney metropolitian area. The introduction of before and afterschool care has increased the business potential of some centres, however this has created the burden of additional management complexity. An additional cause of slowing site sales is the merging trend for childcare centres to be associated with educational establishments. It has become evident of late that there is a shortage of qualified staff, namely teachers, and this issue has resulted in wage pressures, which has impacted levels of service, profitability and fees.
Key Valuation Considerations Childcare centres have emerged as a highly specialised type of property which is now viewed as a distinct asset class in the property industry. Valuers should consider child care facilities as specialist in nature and must only use rental evidence of other centres. Rental evidence can be difficult to collect, and care must be given to avoid dated leases, centres that are dissimilar in size, whether the centre is purpose-built or located within an older building constructed for another purpose. The most accepted method of valuation is analysis on a ‘per head’ basis, which refers to the number of children the property is licensed to accommodate. When conducting an assessment of the rental of a childcare centre, the most important factors that must be assessed include location, centre configuration, license numbers, trading history,
Childcare Centre Market In recent years, companies such as ABC Developmental Learning Centres (a formerly publicly listed company) had been buying centres in both metropolitan and regional areas, which led to an upwards push on values of childcare centres which pushed many smaller, entrylevel investors out of the market. The collapse of ABC Learning has had a significant impact on the market, and many leasehold centres have been sold at discounted prices. At the time of the collapse, it was reported that approximately 40% of ABC Learning Centres had been running at a loss, and these unprofitable centres have since closed. The prices of raw sites that are suitable for childcare centre requirements (notably sufficient parking and playground area) have slowed dramatically in the Sydney market in the last few years, which has been caused by high construction costs and limited investment feasibility.
• How long have the staff been associated with the centre?
• Does the centre enjoy a prominent position with good exposure and easy access, or is it in a poor location with little to no exposure?
• Does the centre have room configuration, or a licence based on places? For example, a centre licensed with 75 places with five activity rooms will generally be licensed for children aged six weeks to school ages, whilst a four room centres will generally be licensed for children aged 15 months to school age. • How has the centre performed over the last three financial years? Has financial performance been consistent?
• How high or low are the occupancy rates? These are intrinsically linked to trading history, and the occupancy of each room must be determined to ascertain whether there are any ‘weak’ rooms within a centre, as this will impact value. This method relies on recent comparable rental evidence and analysis based on the number of places. Whilst this is widely considered to be the most accurate valuation method, it is recommended that a secondary check method is applied to further validate any valuation conclusions. The rate per licensed childcare place is generally dependent upon factors such as the centre’s historical financial performance, location, the quality of the improvements and surrounding competition. When assessing comparable sales evidence, valuers should make adjustments for any locational factors, exposure, age, condition, area, building services, car parking and access within their consideration of valuation calculations and the rate adopted for the subject property. Rate per m2 of NLA A useful secondary check method for the rental valuation of a childcare centre is the comparison of rates per square metre of Net Lettable Area (NLA) analysed from leases of similar childcare properties within the area. This form of comparison can fluctuate slightly, given the varying levels of income, market review periods, lease covenants, location, availability of on-site parking, building services provided, age and condition of etc. Nonetheless, it is accepted that such a comparison provides a reasonable indication of value as a check method.
• Does the centre have competition? One of the key determinants of a centre’s success is the surrounding competition, and the likelihood of competition disrupting centre profitability. Rate per Licensed Childcare Place A common method used to value the rental of childcare centres is determining a rate per licensed childcare place.
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