Childcare Centres

Discussion in 'Commercial Property' started by Zedlum, 11th Jan, 2013.

  1. Zedlum

    Zedlum Member

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    What is the common wisdom about childcare centers? I have seen a few advertised and they seem to offer a higher net than many investments. What is the catch?

    Thanks.
     
  2. Pete Ramoza

    Pete Ramoza Member

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    Zedlum,

    Good question! I will watch with baited breath...
     
  3. Aaron_C

    Aaron_C Finance Broker

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    The catch is that they are considered specialised securities (like petrol stations) and hence are harder to finance.
     
  4. Zedlum

    Zedlum Member

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    OK.

    I understand why petrol stations are riskier but what is it about childcare centers that ups the risk? Do they have a short shelf life? The leases seem to be longer than average.
     
  5. Aaron_C

    Aaron_C Finance Broker

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    It's because after the GFC the banks were losing a lot of money on childcare centres because lots of them went bust (ABC Learning etc). The numbers on the childcare centres don't really work that well since they are reliant on government funding so funders don't think it is worth that much.
     
  6. Zedlum

    Zedlum Member

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    Yeah, I guessed that might be lurking.

    OK, that makes sense, too heavily reliant on government policy is always bound to add to private sector nerves!
     
  7. Rolf Latham

    Rolf Latham Member

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    typically, 10 year loan terms are about it : (

    We are just doing a highly profitable freehold and the business owned by the same people.

    i cant believe how conservative the lenders have been with this puppy.

    Not easy to get decent finance for thats for sure

    ta
    rolf
     
  8. Dazedmw

    Dazedmw Member

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    I think one of the issues is the lack of alternative uses. You buy a shop in the main street and your newsagent moves out, there are a dozen different businesses who could use that space. But you purchase a childcare centre expecting income from a childcare business and then that business goes bad, its hard to replace that tenant.

    Add this to that the fact that childcare is a sector in flux, largely dependent on government policy, and you have a riskier proposition than most forms of commercial property.
     
  9. Aaron_C

    Aaron_C Finance Broker

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    I guess it really depends on what the configuration of the childcare centre was. Some are better than others so it becomes less specialised.
     
  10. Zedlum

    Zedlum Member

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    I have considered that many could be returned to or altered to resi. That seemed to me to be a reasonable out if all else fails.

    How so? I thought that childcare has good policy support from both sides, but I admit that I have not looked that closely yet.
     
  11. Dazedmw

    Dazedmw Member

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    The question with that is does that change the income. If a property is generating $500 a week net as a childcare centre but would only lease for $425 a week gross as a residence then there is risk involved. Conversion costs are likely as well.

    I guess demand for childcare services is dependent on direct government subsidies. Government change, as do policies and while all property classes are influenced by government property, childcare is probably more directly influenced than most.
     
  12. weg

    weg Member

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    My understanding was ABC Learning expanded very quickly and had a very high LVR, and when the share price plummetted they went under.

    So more to do with financial/accounting reasons than the childcare business itself.
     
  13. datto

    datto Member

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    Cant see govt abandoning funding.

    Parents wouldnt be able to afford childcare otherwise. Pretty tough as it is.

    Just noticed a brand new childcare centre being built next to a Public school. All pretty colours. Another centre just around the corner just got a fresh paint job. Must be big money in it.
     
  14. Dazedmw

    Dazedmw Member

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    I wouldn't think so either.

    But is it impossible for government policy to change in such a way to reduce (not necessarily eliminate) revenue for childcare centres. No, not impossible. So there is perceived to be some risk there.
     
  15. Aaron_C

    Aaron_C Finance Broker

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    Yes but this impacted the banks through the landlords who leased to ABC. There were heaps of mortgagee auctions of childcare centres since the collapse which has led lenders to caution against them as acceptable securities.
     
  16. datto

    datto Member

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    IMO that would be political suicide.

    It would erode consumer confidence. Many households would have to "tighten the belt" in order to pay their childcare.
     
  17. Zedlum

    Zedlum Member

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    I would say that is right. IMO policy is leaning toward more rather than less early childhood care and education facilities. They have worked out that it is cheaper to support children and help keep them on the rails than deal with adults that have a lack of support. In western government circles it is considered a good investment in lowering future costs... be they right or wrong this is what the studies are saying.
     
  18. weg

    weg Member

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    A friend of ours (and his partner) have managed to finance the building, establishment and running of 13 child care centres over the last few years.

    He started around 2007 and has continued to grow in number through the GFC to now.

    Don't know the ins and outs of his financial affairs but from what i've been told it can be very profitable.
     
  19. Zedlum

    Zedlum Member

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    I know a very successful retirement home developer that has now switched to child care centers. If his track record counts for anything it is not a bad move to follow his lead.

    2c
     
  20. chindonly

    chindonly Member

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    Childare centres can be profitable, but depends enourmously on location, demographics, competition and the quality of your staff.

    Some areas are saturated with competitors, so very hard to make a decent $.

    In Qld, breakeven is around 80% occupancy on a 70-80 place centre.

    Each State is also different, with fees charged varying yp to 15 - 20%.

    Very hard to strip down a purpose-built childcare and turn into a residential, with many large communal bathrooms, usually a lot of glass partitioning, unusual room configurations etc.

    Large car park also probably lends itself to commercial lease.

    Probably better to be the landlord, rather than the operator - as per the OP question.