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NSW childcare assets in line for post-election boost

CHILDCARE assets have gone through much change over the past 12 months, but post-election confidence meant commercial investments and alternative asset classes would be more popular once again, according to Ray White’s latest Between the Lines* report.

“Once the hottest alternative investment asset, demand reduced as banking regulation made it difficult to obtain lending, resulting in an increase in days on market and some growth in investment yields,” said Ray White’s Head of Research Vanessa Rader.

“While volumes maintained a strong rate, the limited competition resulted in assets without strong occupancy or in sub-prime locations attracting higher yields; although quality establishments continued to achieve sub-five per cent yields.

“While volumes have been limited early in 2019, many buyers were in standby mode waiting on the outcome of the State and Federal election and its impact on the property market.

“Post-election, we’ve already seen APRA relax serviceability on home loans, which is likely to improve confidence surrounding the investment into commercial investments and alternative asset classes.

“With yields showing some uplift over the last year, we anticipate this may recover during the remainder of the year as sentiment shifts.

“The slowdown in development activity in this space will also subdue concerns around oversupply, with many projects notably in regional locations now more cautiously demand-led, keeping occupancy elevated.”

Ray White Commercial NSW Director Michael Ajaka said NSW’s strong population growth would ensure that childcare assets would remain at high occupancy.

“This heavily government subsidised income stream will continue to be attractive to private buyers, which is likely to result in downward pressure on yields,” Mr Ajaka said.

“We’ve seen a slowdown in development of new childcare centres over the past two years after a long, high supply period, in line with the Sydney housing boom.

“Currently there are 399 projects at various stages of planning throughout NSW, of which 78.2 per cent are located within the greater metropolitan Sydney area.

“There are 33 projects currently under construction with completion expected over the next 12 months, of which 24 are located within metropolitan Sydney in long-established suburbs, catering for growth in population in the more traditional, long-standing suburban locations.”

Mr Ajaka said there continued to be an appetite for alternative, strong yielding assets across the country during this time of prolonged low interest rates.

Childcare assets were in hot demand over the 2015 to 2017 period as many smaller private investors looked to these properties due to their secure income stream which is heavily subsidised by the government,” he said.

“However, as yields pushed down, we saw banks clamp down on lending, which saw many assets take longer to sell due to reduced market competition, with many investors looking more closely at their location.

“Although investment levels during 2018 increased, the caution shown by investors translated into a move in average childcare yields.

“Investment yields for metropolitan assets traded at an average of 4.5 per cent in late 2017, with yields sub-four per cent seen across many auction rooms, while regional assets looked affordable hovering around the six per cent mark.

“Twelve months later, and as banks continued to tighten lending regulations, we saw these yields increase. The average rising to 5.8 per cent for metropolitan assets and closer to seven per cent in regional locations.”

Ms Rader said the remainder of 2019 looked to be an exciting time for the small commercial market.

“The outcome of both the State and Federal Election is likely to give many investors greater certainty to reignite their investment activity into quality, secure yielding investments,” she said.

Childcare assets are well poised to benefit from this renewed activity as banks relax their conditions around serviceability.

“However, consideration surrounding new stock needs to be strongly demand-led to keep occupancy levels high, this will have a positive impact also on yields throughout the remainder of this year.”

*Ray White Between the Lines – NSW Childcare Overview – May 2019.

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