Growth of childcare centers

Child Care in Australia

CHILD CARE WHITE PAPER | AN INDUSTRY REVIEW MAY 2016

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Child Care White Paper | May 2016 | Colliers International

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KRISTINA MASTRULLO Manager, Research BRIAN MCINALLY Associate Director, Transaction Services, Child Care

Introduction

An Industry Review > Introduction > Current Ownership Landscape

Australia has in recent years experienced a surge in demand of child care services and as the costs of these services increase, so too has government support. The Federal Government first introduced subsidy payments for child care in the early 1970s and now, 40 years on, the government’s continued financial support, acting as the main driver for growth, has transformed this sector into an investment grade asset class.

> Child Care Services Used

Now, over 1.2 million children attend approximately 17,000 government approved child care services nationwide, and those numbers have grown substantially over the last 5 years, recording a 4.6% annual growth rate.

> Industry Drivers

In addition to government investment, regulatory changes, changing demographics, population projections and workplace trends have also led to the development of new child care centres, especially in inner city and metropolitan areas. Even the demise of ABC Development Learning Centres in 2008 has contributed to the current state of play within the industry, bringing with it a completely new set of market participants. What was a highly fragmented and community based sector, has gradually seen consolidation and become an appealing investment class for institutions. Child care is currently in its growth phase, with institutions becoming aggressive in their pursuit for market share, however, regardless of these drivers, there are some limitations. As institutional investors such as G8 Education Limited, Arena REIT, Folkestone Education Trust and Affinity Education Group enter their development cycle, we’ll see the availability of suitable sites diminish, intensifying competition while simultaneously having the ability to stall growth. Moreover, an upskilling in staff, increased educator-to-child ratios and the implementation of educational programs will see an uplift in operational costs, contributing to slowed growth in the short-term as centres take time to adjust to recently imposed government regulations.

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Child Care White Paper | May 2016 | Colliers International

> Growth of Child Care Centers > The Future of Child Care > Our Track Record

Current Ownership Landscape MAIN MARKET PARTICIPANTS

MARKET Market Share bySHARE Type BY TYPE

Main Market Participant Share KU Children’s Services 7%

Other 7%

AREIT 28%

Goodstart 31%

Affinity 8%

Not -for - profit 38%

Arena REIT 9%

Folkestone Education Trust 19%

G8 Education Limited 19%

Listed 29% Private 5%

Source: Colliers International / Company Reports NB: ‘Other’ includes portfolios under 100 centres

Source: Colliers International / Company Reports

e: Colliers International / Company Reports

Child Care Services Used Occasion al Care 0.5% Long Day Care 52.0%

0%

20%

Family Day Care 17.4%

40%

60%

Outside School Hours Care 30.1%

80%

100%

Source: Colliers International / Department of Education and Training

• Long Day Care: providing all-day care or part time care for children, usually below school age. This service caters for the most amount of children with over 660,000 attending nationally. As the most popular form of child care, it has felt steady growth over the last 5 years. There is a heavy reliance for this service by parents particularly for children aged 0-4 years.

• Occasional Day Care: mainly catering for the needs of families who require short term care for their children, usually non-school aged. This service is flexible to community needs, providing care at short notice and in emergencies. Used intermittently, this segment accounts for approximately 6,670 children nationwide and is the least popular service.

• Family Day Care: educators providing flexible care and developmental activities in their own homes for other people’s children on behalf of an approved Family Day Care service. This segment is popular within regional areas and has seen growth since 2013 after a period of remaining flat.

•Outside School Hours Care: for school-aged children before or after school during the school term. As parents are working longer, varied hours the number of children in this segment grows. This also includes vacation care (child care services during school holidays) which is becoming more popular adding further demand for outside school hours care services.

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Child Care White Paper | May 2016 | Colliers International

Growth of Child Care Centres AU S T R ALI A

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

5,930

6,656

12.2%

2.6%

Family Day Care

389

838

115.4%

24.3%

O ccasional Day Care

85

116

36.5%

7.7%

O utside School Hours Care

7,495

9,356

24.8%

5.2%

Total

13,899

16,966

22.1%

4.6%

Q u e e n slan d

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

1,335

1,433

7.3%

1.5%

Family Day Care

112

136

21.4%

4.5%

O ccasional Day Care

10

8

-20 .0 %

-4.2%

O utside School Hours Care

1,556

1,885

21.1%

4.5%

Total

3,0 13

3,462

14.9%

3.1%

N e w S o u th Wa l e s

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

2,413

2,740

13.6%

2.9%

Family Day Care

112

256

128.6%

27.1%

O ccasional Day Care

38

36

-5.3%

-1.1%

O utside School Hours Care

2,166

2,723

25.7%

5.4%

T o ta l

4,72 9

5 ,75 5

2 1. 7%

4. 6 %

Au s tr a l i a n Ca p i ta l T e r r i to r y

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

111

136

22.5%

4.7%

Family Day Care

6

13

116.7%

24.6%

O ccasional Day Care

3

4

33.3%

7.0 %

O utside School Hours Care

165

20 3

23.0 %

4.8%

T o ta l

285

356

2 4. 9 %

5 .2%

V i c to r i a

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

1,125

1,249

11.0 %

2.3%

Family Day Care

10 3

333

223.3%

47.0 %

O ccasional Day Care

19

52

173.7%

36.6%

O utside School Hours Care

1,957

2,30 7

17.9%

3.8%

T o ta l

3 ,2 0 4

3 ,9 41

23 .0 %

4. 8 %

T a s ma n i a

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

10 6

115

8.5%

1.8%

Family Day Care

13

13

0 .0 %

0 .0 %

O ccasional Day Care

4

4

0 .0 %

0 .0 %

O utside School Hours Care

235

243

3.4%

0 .7%

T o ta l

358

3 75

4. 7%

1. 0 %

S o u th Au s tr a l i a

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

30 0

344

14.7%

3.1%

Family Day Care

14

32

128.6%

27.1%

O ccasional Day Care

2

4

10 0 .0 %

21.1%

O utside School Hours Care

817

927

13.5%

2.8%

T o ta l

1,13 3

1,3 0 7

15 . 4%

3 .2%

We s te r n Au s tr a l i a

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

473

552

16.7%

3.5%

Family Day Care

24

51

112.5%

23.7%

O ccasional Day Care

9

11

22.2%

4.7%

O utside School Hours Care

499

965

93.4%

19.7%

Total

1,0 0 5

1,579

57.1%

12.0 %

N o r th e r n T e r r i to r y

Ju n - 10

M a r - 15

% CHANGE

ANNUAL GRO WTH RATE

Long Day Care

67

77

14.9%

3.1%

Family Day Care

5

4

-20 .0 %

-4.2%

O ccasional Day Care

0

0

0 .0 %

0 .0 %

O utside School Hours Care

10 0

10 3

3.0 %

0 .6%

172

18 4

7. 0 %

1. 5 %

T o ta l Source: Department of Education and Training

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Child Care White Paper | May 2016 | Colliers International

Industry Drivers Out of pocket expenses for Long Day Care service

Government Assistance The Government’s financial support of child care, together with a continued effort in boosting national productivity, have been key catalysts for the industry’s recent transformation. Since FY2003/04, the government has contributed nearly $40b in subsidy funding in a push to encourage parents, in particular women, to return to the workforce after a child is born. As a result, the demand for formal child care substantially increased, with 24% of all children under the age of 14 using government approved establishments in 2014, up from 13.4% in 1996. Conversely, informal child care has seen a decline as subsidies have made child care services accessible to all income classes.

Actual and estimated rebate government funding (3 year periods) 28.5

30

19.3

$ Billions

12.7

15 10

6.3

5 0 2003/04 - 2006/07

2007/08 - 2010/11

2011/12-2014/15

2015/16 - 2018/19

Budget Year

Source: Colliers International / Department of Education and Training NB: The Government’s $3b child care package including the replacement of the Child Care Rebate and Child Care Benefit with the Child Care Subsidy has been delayed to mid-2018 as reported in the 2016-17 Federal Budget.

Long Day Care, the most popular form of child care, can cost up to $170 to $200 per day in some of our capital cities, which equates to an annual cost of up to $52,000 (if used Monday to Friday, not allowing for public/school holidays). With the Child Care Rebate (CCR) and Child Care Benefit (CCB), families are given the ability to access child care with out of pocket expenses coming to as little as 9% of gross family income. Absent government assistance measures, actual child care costs can climb to almost 50% of gross family income which has the propensity to cripple lower income earning families. Prior to these government subsidies, the female participation rate achieved little to no growth and informal care (family and friends) was heavily leant on.

6

44%

Before Government Subsidies

38%

40%

After Government Subsidies

32% 30%

26%

23%

20% 11% 10%

11%

10%

11%

12%

21%

18% 12%

12%

17%

15% 11%

14% 10%

9%

0% $35,000 $55,000 $75,000 $95,000 $115,000 $135,000 $155,000 $175,000 $195,000 $215,000

Gross Annual Family Income Source: Colliers International / Department of Education and Training NB: Out of pocket expenses are shown for families with one child attending long day care for 50 hours of care per week

The CCB is income tested to determine the subsidy received, with the additional CCR providing a further rebate of 50% of out of pocket expenses up to $7,500. The new Child Care Subsidy (CCS), delayed in the 2016-17 Federal Budget to mid-2018, will replace both existing subsidies and be activity tested. It aligns the hours of parental work to subsidise the child care hours utilised and lifts the existing $7,500 cap to $10,000 for families earning less than $185,000.

25 20

50%

Child Care White Paper | May 2016 | Colliers International

Additionally, CCS includes a provision for families earning a combined income of $65,000 and under where they are eligible for a subsidy of up to 24 hours without undertaking the activity test. Should this change apply come mid-2018 as reported, demand for services will be expected to surge as the introduction of the CCS will open up the pool of child care users to lower-income families, increasing accessibility.

National Quality Framework (NQF) The Productivity Commission Report on Government Services has proven child care creates additional benefits for the community as a whole, such as better socialisation, help with the transition to school and improved performance in the early years of primary school. In light of these findings, the government has developed the National Quality Framework (NQF) which is intended to place more emphasis on educational services within child care as opposed to viewing them simply as child minding centres.

• Additionally, child care ratios continue to evolve with new ratios from the beginning of this year of:

1 January 2016 marked the date where care providers for all Long Day Care (LDC) centres are to work towards their Certificate III in Early Childhood Education and Care, at least half of the LDC staff from each centre are to be qualified. According to the COAG (Council of Australian Governments) Report, educational standards to be set by 1 January 2014 are:

Consequently, we believe it’s reasonable to expect some future wage inflation as government regulations force an element of upskilling in existing and additional staff required to operate government approved centres.

• All family day care coordinators will need to have a diploma level early childhood education and care qualification or above; • All family day carers will be required to have (or be actively working towards) a Certificate III level early childhood education and care qualification or equivalent.

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Child Care White Paper | May 2016 | Colliers International

• 1 staff member to every 5 children from 25 to 36 months previously operating at a range between 1:6 to 1:10 (dependent on state); • 1 staff member to 11 children 36 months and over - previously operating at a range up to 1:13 (dependent on state)

However, despite the increase in labour costs eventually flowing through to the consumer, the adverse impact on attendance could possibly be offset by; a) government funding and b) the desire for parents to provide educational resources before their children reach formal schooling age.

Return to the Workforce Labour force participation rates strongly impact demand for child care services, as does the type of participation involved, i.e. part time, full time or shift work.

Female work participation rates have risen over the last few decades, presenting a long term opportunity as a growing number of families use formal child care services. As at March 2016, the female participation rate sits at 59%, which has increased steadily from 44% in 1979.

Female employment participation

55% 4,000,000 50%

3,000,000 2,000,000

45% 1,000,000 0

40%

Mar-78 Mar-79 Mar-80 Mar-81 Mar-82 Mar-83 Mar-84 Mar-85 Mar-86 Mar-87 Mar-88 Mar-89 Mar-90 Mar-91 Mar-92 Mar-93 Mar-94 Mar-95 Mar-96 Mar-97 Mar-98 Mar-99 Mar-00 Mar-01 Mar-02 Mar-03 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16

Female workforce (number of women)

5,000,000

Female participation rate (%)

60%

6,000,000

Female workforce

Female participation rate

Source: Colliers International / Australian Bureau of Statistics

Again, government assistance i.e. the freeing up of disposable family income, has been a large contributor in women returning to the workforce after child birth and unsurprisingly, the main driver

of using child care services is a desire to re-enter the workforce. As accessibility to child care remains within reach, the participation rate for women will continue to climb.

Reason attended formal care 5%

Beneficial for child

24% 4%

Personal

10% 89%

Work-related

65% 0%

10%

20%

30%

40%

Children who attended school Source: Colliers International / Australian Bureau of Statistics

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Child Care White Paper | May 2016 | Colliers International

50%

60%

70%

80%

Children who did not attend school

90%

100%

Population Projection: 0-14 years The number of children using formal day care continues to increase, along with wait lists at many centres, particularly those located in inner urban areas. Child care initially emerged with the onset of the baby boomer generation, where a post-war increase in population was prevalent. Since then, the increase in the birth rate has continued. When comparing periods 2001-2006 and 2006-2011, the addition of children to the population aged between 0 -14 years was 42,000 and 230,000 respectively – this is a difference of 448%. As at June 2015, this cohort also makes up 18.9% of the Australian population and according to the Department of Training and Education 30.8% use formal government approved child care services.

Population projection 0-14 years 6.90

7 5.90

Millions of persons

6

5.30 4.50

5 4

6.30

3.80

3 2 1 0 1974-75

2014-15

2024-25

2034-35

2044-45

2054-55

Yearsof Statistics Source: Colliers International / Australian Bureau The growth in children aged 0-14 is also largely underpinning future demand of the sector with another approximately 500,000 children between 0-5 years estimated to be added to the population over the next 15 years. According to figures by the Australian Bureau of Statistics (ABS) children aged 0-14 years are growing at an average rate of 1.4% since June 2012, with the 0-4 age group having accelerated growth within that category. The ABS and Australian Treasury have projected population growth of children 0-14 years at 5.3 million by 2024-25 representing an annual growth rate of 1.8% from 2014-15, when the population of this age group was 4.5 million.

9

Child Care White Paper | May 2016 | Colliers International

The Future of Child Care Over the next 5 years population forecasts and maternal participation rates will continue to drive demand in the child care sector with further growth a near certainty as the Australian Government focuses on providing affordable and accessible child care services. Conversely, operating costs will likely experience some inflationary pressure due to imposed regulatory standards, however this isn’t expected to impact the sector’s trajectory greatly. Recent history and forward projections indicate child care will continue as a sector of sustained growth, largely supported by social trends. It’s unlikely it will retreat to its previous highly fragmented nature as institutions have aggressively taken opportunities to enter a performing market, growing market share and gaining economies of scale. Accordingly, industry consolidation will continue as acquisition and merger activity is expected to increase.

10 Child Care White Paper | May 2016 | Colliers International

Our Track Record ld

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63 Lindwood Ave, Dee Why NSW

41 Gum Nut Drive, Langwarrin VIC

Bambinis Early Learning Centre QLD

71 Roseberry Ave, Auckland NZ

Sold to private investor via sale & leaseback arrangement for $6 million at a 5.97% net yield

Sold $1.7 million. Leased to G8 Education with 15 year lease. Yield 5.26% and 20% above reserve

Sold $2.2 million. Leased to Affinity Education Group with 20 year lease till December 2032. Yield of 6.82%

Sold $2.53 million. Leased to Evolve Education Group with new 15 year lease. Yield 5.3%

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L4, 11 Harrington Street, Sydney NSW

15 Castlereagh Street, Sydney NSW

Go Kindy | Merewether NSW

North Sydney Child Care Portfolio NSW

Commencing early 2016, Little Kingdom Childcare have leased on a 10 + 10 year lease

Traditional office building accommodating change of use to child care on 5 years plus 3 x 5 lease

Brand new child care centre on 10 + 10 year lease to Go Kindy opening late 2016

Rental review of a portfolio of seven child care centers on behalf of North Sydney Council

> Our Team Whether you are a developer, owner or occupier of childcare space, Colliers International has the specialised capabilities to accelerate your success. Our collaborative team offers a diverse range of skills to provide you with a truly integrated offering of child care services combined with immediate access to the latest market knowledge all coming together in our total solution package. We work with local and off shore clients to market your child care centres and source fresh opportunities to achieve the best price for your asset.

Brian McInally Associate Director Transaction Services | Child Care 0409 838 982 [email protected]

Chris ODriscoll Associate Director | Valuation Healthcare & Retirement Living 0418 724 225 [email protected]

11 Child Care White Paper | May 2016 | Colliers International

Liam Greentree Valuer Healthcare & Retirement Living 0477 600 128 [email protected]

Kristina Mastrullo Manager Research 0422 126 379 [email protected]

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