Should you invest in Early Childhood Education Centres?

The early childhood education sector in New Zealand has experienced a lot of change over recent years. It is an industry that has seen steady growth, partly fueled by population growth and the introduction of government policies like 20 Hours Early Childhood Education (ECE).

Due to this government support, the number of ECE services in New Zealand has increased by 7% in the past three years, with the number of qualified teachers increasing by 11.7%.

For many commercial property owners, this represents a new opportunity for property investment. But like any growing market, it’s important to be aware of the factors that affect it and the value of the property.

What defines an ECE property?

Before investing in an ECE property, you should know exactly what it is. The Ministry of Education states that childcare facilities can cover several different types, including:

• Kindergartens 
• Childcare centres
• Te Kōhanga Reo
• Play centres 
• Play groups

Every ECE centre needs a licence. To obtain an ECE centre licence, there are a number of requirements that must be met, such as:

• Building requirements and outdoor space
• Health and safety standards
• Food and drink facilities
• Sleeping facilities

What does the ECE market look like?

Population growth and government support and have contributed to the rise of ECE centres throughout New Zealand. As a growing market, the childcare sector has seen a lot of interest from commercial property investors.

What rental prices can you expect out of ECE centres? Rentals on childcare facilities are generally calculated on the basis of a rate per licensed child, per annum. Because of this, the size of the facility is a significant factor in rental prices.

This can be broken up into two main types: converted residential dwelling and purpose-built facilities.

To give you an example, in Tauranga, converted residential dwellings can lie between $1,500 and $2,000 per child, whereas purpose-built facilities tend to be higher, priced between $1,750 and $2,750 per child.

In the past, converted residential dwellings were commonplace, but due to the recent growth of ECE centres, the market is now dominated by purpose-built facilities.

What you should consider when investing in ECE centres?

If you are a commercial property owner, there are several things you should consider when investing in ECE centres. As with any investment property, the potential value is determined by the overall quality of improvements, location and sustainable income (which is driven by the quality of service).

There are several factors which affect rent, many of which are unique to ECE properties, such as:

• The level of landlord provided fitout
• The number of licensed children
• The space provided per child
• The age of the facility
• The location and level of competition from other centres

What does this mean for property investors? Sales evidence indicates that childcare centres show similar levels of return to the wider market for commercial property. While ECE centres present a good investment opportunity, not every property is the same and there are many things to take into account.

If you’re looking to invest in an ECE centre, here are a few questions to ask yourself and your valuer:

• Is this a new business? New startups present a higher risk as they don’t yet have a wide client base and haven’t fully established their business yet.
• How many other ECE centres are nearby? As rental prices are typically set per child, the level of competition for enrolment numbers is significant. Is there already an oversupply of ECE centres in the area? Or will there be more opening up in the future?
• What are the government regulations and could they change? Since ECE centres are influenced by government regulations (such as the 20 Hours Free policy), it’s important to be aware of the regulations and restrictions enforced by the government. The ECE industry is heavily reliant on subsidies and any policy change is bound to have an effect.
• What is on the deed of lease? Make sure you study up on the deed of lease. This will specify what is owned by the landlord or tenant, which is important to consider when thinking about long-term maintenance. For example, things like playground equipment will depreciate over time and the cost of upkeep could fall on the landlord or tenant, depending on who owns it.

Our TelferYoung valuers as well experienced in the commercial property market and can provide valuable insights and advice for those looking to invest. If you’re looking to enter into ECE property investment and need some advice, talk to your local valuer today.

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Posted 8 months ago