A significant jump in the number of childcare centres being developed and sold has not diminished investor appetite with yields tightening across the sector, research from Burgess Rawson shows.
The real estate agency transacted 76 per cent of childcare centres sold Australia-wide in the 2017 financial year, a total of $231 million in sales.
"Nationally, our estimate for new childcare development pipeline over the next two years is $830 million," associate director Adam Thomas said.
While development and sales volumes have risen sharply over the past three years, average yields have crunched from a peak around 8.5 per cent in 2012 to 5.84 per cent this year, the agency's figures show.
A childcare centre that sold in the exclusive Sydney suburb of Vaucluse in May, boasting blue-chip G8 Education at its tenant, achieved a yield of 3.57 per cent, representing the sharpest return so far for these assets.
Another director, Ingrid Filmer, said supply had continued to increase even while yields compressed.
"Regardless of the increased supply, demand actually hasn't been met from an investor point of view," she said.
"If you put that many extra service stations or supermarkets into the market you would see yields affected. But for childcare it is the opposite. We don't see this in any other sectors."
A number of trends were driving growth in the industry.
Key among them were government funding, demand for places and an increase of workforce participation.
The federal government's new Childcare Subsidy System was projected to spend $8.8 billion in subsidies next financial year, a figure forecast to rise to $10 billion by 2020.
Lower-income families will get a larger portion of the subsidy pie under the changes.
"Government subsidies underpin rents and that's why we are seeing such interest in it as an investment class," Ms Filmer said.
Population growth on the urban outskirts of cities was also driving the development of childcare centres.
Rents range between $1500 and $6000 per childcare place, with an average for metropolitan areas of $3000 per place, figures show.
Consolidation in the sector was also likely to drive change with the largest players, Goodstart, G8 Education, Affinity Education, KU and Guardian Early Learning, accounting for just 14.7 per cent of the market.
G8 showed its expansion plans in September when it spent $27 million to purchase Eclipse Early Learning, a Melbourne-based operation with 19 centres across Victoria, NSW and Queensland.
"Although yields may soften or ease a bit, the key fundamentals of the sector remain," Mr Thomas said.
