The Valuers' View - Child Care Property

March, 2021

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The Valuers’ View

To assist lenders, investors and owners, the Valuers at m3property have contributed their opinions on the current performance of the property markets and where they expect those markets to head over the short to medium-term.

The survey examines nine property sectors, looking at the key measures of market yields, internal rates of return (IRRs), rents incentives and value. Occupancy rates and average daily room rates were added to the survey for the hotel sector. Indicators including zeros indicate stability was also selected by respondents.

The key themes that will drive the real estate markets in 2021 will be:

  • Economic recovery as restrictions ease and confidence returns

  • Low population growth, but likely to rise as the vaccine rollout continues and borders re-open

  • Record low interest rates

  • Continued focus on Environmental, Social and Governance (ESG) factors when investing and managing portfolios

  • Growth in inflation resulting in rent growth for landlords, where rent increases are linked to inflation

  • The gap between prime and secondary yields is likely to widen

  • Government spending to remain high, despite stimulus starting to reduce

  • ‘Flight to quality’, flexible terms and convenience expected to continue to drive tenant demand

  • Rebound in investor demand due to cashed-up investors, low cost of debt and global interest in strengthening countries with stable property returns

  • Continued investor focus on defensive assets, particularly in sectors with government backing and for properties with long WALEs and minimal need for capital expenditure

  • Despite strengthening residential markets, the official cash rate is likely to remain on hold in the short to medium-term due to continuing economic uncertainty, low wages growth and labour markets not being at full capacity. The appearance of an asset price bubble is more likely to be remedied with macro-prudential constraints on lending rather than rising interest rates, which could derail the economic recovery if used too early.

  • If the post-COVID-19 economic recovery does surprise on the upside resulting in asset price bubbles, full employment and rising wages, this would drive up inflation, bond yields and the cash rate. This scenario would represent a risk to the property markets as it could flow through to the cost of capital and yields. That said, the RBA is likely to continue to implement yield curve control to keep bond yields in line with the economic recovery and a strengthening economy would provide stronger cash flows and vacancy would reduce.

Authors

Michael Schwarz

Divisional Director

View Profile > SA
James Ruben

Director

View Profile > NSW

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Child Care Property

Child care was considered an essential service during the pandemic lockdowns resulting in centres remaining open and government support to keep the sector viable.

This government funding makes the sector resilient in a downturn and has resulted in increased investor confidence.

Child Care Results

Yields and IRRs

  • These yield projections refer to freehold investments only. Leasehold and Going Concern yields are not included.
  • Yields and IRRs for child care property have shown some tightening for good quality well-leased centres with strong lease covenants. Investors have continued to shy away from riskier assets.

Rents and Incentives

  • The child care sector has adjusted quickly to COVID-19 with the support of the Government. Operators are now seeing strong demand returning, driving up rental growth.
  • Incentives are not a feature of child care property cash flows in all markets. Where they are used, incentives are often linked to the cost of the fit-out. These costs are expected to stabilise over 2021.

Values

  • Investors see child care as a strong performing sector that benefits from Government support. The market has viewed these assets positively in times of uncertainty, which has driven demand and asset values.