A $40m childcare centre portfolio has hit the market as investors chase one of commercial property’s safest-looking bets, but experts have warned buyers could be walking into a hidden trap.
Four Melbourne childcare centres in Bundoora, Preston, Point Cook and Melton are being offered for sale individually or in one line, with the portfolio generating more than $2.39m in annual net income.
The centres are leased to Niño Early Learning Adventures, Kids Academy Early Learning and Papilio Early Learning, with a weighted average lease expiry of 11.78 years and fixed annual rental increases of 3 per cent.
RELATED: Melbourne Kmart’s $599 sofa move revealed
AFL favourite backs $131m St Kilda play
Squeezed Aus renters hit with new blow
But while long leases and exposure to Melbourne’s family-heavy growth corridors are expected to attract strong investor interest, Vanta Advisory buyer’s agent Alex Groh has warned childcare centres can turn risky quickly if suburbs become oversupplied.
Mr Groh estimated the portfolio could be worth about $35m-$40m in the current market, but said he had a “contrarian” view of the asset class.
“I really dislike childcare centres,” Mr Groh said.
“One issue I have with them is the potential oversupply, where you can essentially build a childcare centre anywhere.
“We have seen that in outer suburbs where there are multiple childcare centres on the same street, and multiple centres that are mostly vacant or partly vacant, and the operator cannot make their rental repayments.”
Mr Groh said the biggest danger for landlords was being left with a highly specialised building that had a limited pool of replacement tenants.
“As an owner, you are left with a building that is highly specialised,” he said.
“There is a massively limited tenant pool that can take that.
“You might have bought a property for $4m or $5m and it is potentially only worth $2m or $3m when it is vacant, and then you have to repurpose it to something else.”
Mr Groh said childcare centres were attractive because they gave investors the appearance of secure, long-term income, particularly when leased to established operators.
“Investors are drawn to safety and security, or at least the perceived safety and security of an asset,” he said.
“When we are looking at childcare centres, they come with really long leases.
“As an investor, if you buy it at a 6 per cent yield and you are getting that income for that entire period of time, that is fantastic. That is a nice, safe return.”
But he said the income was only as secure as the tenant paying it.
“If we get an oversupply of childcare, with many centres opening up within close proximity, and that childcare centre has fewer children going to it and drops below probably 70 per cent occupancy, it is no longer profitable to run that business,” Mr Groh said.
“The operator could wind up and go out of business quite quickly.”
Mr Groh said rising construction costs could help existing centres by making it harder for developers to build competing facilities nearby.
He also said government subsidies were still supporting demand, but warned policy settings could change, as had been seen in other government-backed sectors.
Mr Groh said he would not automatically rule out buying a childcare centre for a client, but would be highly selective.
“If we were buying a property that had a really strong national operator, perhaps it was in a location that had really strong demand for child care, and we were buying it significantly below replacement cost, those are the things that would make the investment more enticing,” he said.
Colliers senior executive and head of premium investments Victoria Lucas Soccio said assets with strong tenant covenants and long lease profiles were tightly held because of their defensive income characteristics.
“These assets offer a compelling combination of durable income, built-in rental growth and exposure to high-demand catchments, which is exactly what investors are seeking in the current environment,” Mr Soccio said.
Colliers national director and head of premium investments Australia Jordan McConnell said child care had become a core investment sector because of its long-term income security and resilience across economic cycles.
“With policy settings supporting participation and ongoing population growth across Melbourne, particularly in the western growth corridors, these assets are well placed to deliver sustained performance over time,” Mr McConnell said.
Colliers national director retail middle markets Tim McIntosh said investors were increasingly targeting defensive, long-lease, non-discretionary assets with strong underlying land value.
“In a more selective investment environment, assets that can deliver stable income while also providing exposure to long-term demographic growth themes are standing out,” Mr McIntosh said.
“This portfolio sits at the intersection of both, which is why we expect strong interest from a broad range of buyer groups.”
Expressions of interest in the Victorian Childcare Portfolio close on July 9.
Sign up to the Herald Sun Weekly Real Estate Update. Click here to get the latest Victorian property market news delivered direct to your inbox.
MORE: Melb first-home buyer adds six figures to sale
Melb fire-survivor has mansion-money twist
‘Red alert’: 38,573 Vic landlords sound the alarm
david.bonaddio@news.com.au
Originally published as Safe commercial property investments face brutal warning