Original blog: Growing interest in childcare valuations reflects investment boom

Original blog:   Growing interest in childcare valuations reflects investment boom

Whether requiring a valuation for a new investment or for refinancing purposes, the childcare sector is a dynamic area of valuation.

Valuations of childcare centres are a growing part of McSSA’s business with both investors expressing interest and operators requiring our input for refinancing.

Faced with a volatile sharemarket, less than generous deposit rates and apartment oversupply in some key capital cities, the security and growth of the childcare sector is attracting more interest from investors.

Now that the collapse of the ABC childcare empire is a fading memory, the childcare industry is booming thanks to financial pressure on families forcing both parents to work and ongoing government subsidies.

IBISWorld forecasts that industry revenue will grow by 34.2% over the five years through 2019-20 to $12.1 billion.

As well as the sentimental factor of contributing to the growth and education of the next generation, investors also see the advantages of  childcare centres having longer-term leases of 10 to 15 years, and the sector being strictly overseen and rated by the federal Australian Children’s Education & Care Quality Authority (ACECQA).

Childcare Centre valuations take in an array of factors

 Valuation of a childcare centre differs from a standard property valuation in that it takes into account the return on investment.  This profit is determined by the number of licensed places, average occupancy and the fees charged per child.

A revaluation of existing centres can add to your bottom line driven by rent increases and yield compression.

Valuation methods for Childcare Centres

There are two common valuation methods used:

Capitalisation of Net Income

Whether valuing a Going Concern, Leasehold Interest or Freehold (Subject to Lease) Interest, the primary method of valuation is the Capitalisation of Net Income, also known as the Income Capitalisation Approach.  This approach looks at the anticipated net market rental return.

Direct Comparison

This method is generally a secondary “check” method to make sure that the value derived from the Capitalisation of Net Income approach reflects a rate per licensed childcare place. This will vary depending on the number of factors including the number of children and the various age groups at the licensed places, building age and condition, location, competition and demographics (ageing vs younger families) and a variety of other factors.

Valuations on Leasehold properties will also take into account the rent being charged and the remaining term of the lease.

Factors that can affect the valuation of a childcare centre

  • The number of children at the centre and the various age groups
  • Location – both the interior and grounds
  • Long serving, skilled staff
  • High number of enrolments
  • Wide range of educational programs offered

If you would like more information about childcare centre valuations, contact McLennan Steege Smith & Associates on (02) 9525 7378.

 

  1. IbisWorld. On fertile ground: Industries benefitting from the baby boom. Accessed: April 13 2016. Available online: http://media.ibisworld.com.au/2015/05/12/on-fertile-ground-industries-benefiting-from-the-coming-baby-boom/
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