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The ABCs of childcare

Investing in the childcare sector isn’t quite as simple as ABC, but it can be rewarding in more ways than one.

API’s July 2010 issue features an article detailing the basics of investing in childcare centres.

Investors who want more details about how financing and leases work in the childcare sector can find them below, in this continuation of the magazine article...

Is finance difficult?

Acquiring finance to buy childcare centres has become more difficult over the past couple of years, as with most property investments. However, Wall and Byrne both say things are starting to improve.

Last year, finance was “decidedly difficult”, Byrne says, but he notes he’s been approached by a couple of banks recently looking to get re-involved in lending to childcare investors and operators.

“They want to be involved, but obviously they’re looking a lot more carefully these days given the exposure they’ve had to these variables.”

Wall says banks are again starting to scream for business in the childcare sector, because they know it’s provided good long-term returns.

Typical loan-to-value ratios (LVR) for childcare purchases are bouncing around from month-to-month, Wall says, and it pays to shop around and not accept the first deal being offered.

One industry insider said typical maximum LVRs were around the 70 per cent mark for freehold purchases and up to 50 per cent for operators looking to buy childcare businesses, although like all commercial finance a number of variables can affect the maximum lend.

What are the leases like?

Childcare leases are typical of commercial property leases, in that the tenant typically pays the rent plus all outgoings plus GST, Byrne says.

Childcare leases are also long-term propositions. Typical arrangements for a fresh lease would be either a five-year starting lease with three five-year options to renew, or a 10-year starting lease with two five-year options.

Stapleton says it could pay to check what happens under the lease if the business operator loses their licence, and what rights of re-entry the owner has.

Wall says investors should ensure their tenants must pay total outgoings and structural changes up to $20,000, and that the tenant is responsible for painting the property every five to seven years.

“Make sure the rent is increased each year by three to four per cent and there’s a market review every five years,” Wall adds.

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