Written by Robert Toth<\/p>\n\n\n\n
Recent Regulatory Developments<\/strong> The government’s National Vision aims to deliver better outcomes for children and includes:<\/p>\n\n\n\n The ACCC review made 8 recommendations to the federal government to improve affordability and access to childcare and recommended the government take a market stewardship role and reconsider its price regulation mechanism due to unintended consequences in the sector between lower disadvantaged areas. Some observers are concerned the sector is close to oversupply however that is not borne out by the statistics on population growth and the Government’s push to continue to support working parents. Whether it is applications for new licenses, development of new centres, or sale and purchase of existing Centres the ELC and Childcare sector is dynamic and active but also increasingly competitive with the larger corporate groups taking up greater market share!<\/p>\n\n\n\n Issues that will impact the sector in 2024\/25<\/strong>:<\/p>\n\n\n\n Developers and Investors<\/strong> Investors<\/strong> As with any investment there are risks and the devil is in the detail so ensuring you do proper due diligence and have experienced financial legal and property advisors on board to reduce risk.<\/p>\n\n\n\n Leasing a Childcare Centre<\/strong> Lease term<\/strong> A rule of thumb is that a tenant\/ operators rent should fall in the range of 8% to 12% of their gross revenue to ensure the occupancy costs are within a range that will make the business viable for the operator.<\/p>\n\n\n\n Rent Review Issues<\/strong><\/p>\n\n\n\n The other big change over the past 2 years has been in rent reviews which were tied to the CPI. For many years was most favourable to the tenant as the CPI was very low whereas now for a tenant the CPI has increased, and no one can predict where the CPI may go over the next few years. Pre-Lease Agreements<\/strong><\/p>\n\n\n\n Building and development a childcare centre carries considerable risk and cost. It is not for the beginner! Knowing what a builder and or landlord will deliver to you as a tenant is critical and the devil will be in the detail and terms of the agreement and the detailed plans. It is the tenant not the landlord that must meet the NQF and Depts requirements to be approval for the operation of the centre, so we suggest the tenant engages its own experts to advise on the plans and process and not solely rely on the landlord \/developers plans.<\/p>\n\n\n\n We have been involved in numerous AFL acting for landlord \/ developers and tenants and we know the issues that need to be addressed in an AFL to avoid dispute and disappointment.<\/p>\n\n\n\n The following are the key issues that need to be addressed and considered:<\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n <\/p>\n\n\n\n For advice on Franchising, Licensing and Distribution contact the Franchise team at Sanicki Lawyers.<\/p>\n\n\n\n <\/p>\n","protected":false},"excerpt":{"rendered":"
The childcare industry is a dynamic sector undergoing constant change and review.
Three key developments over the past 12 months have been:<\/p>\n\n\n\n\n
\n
The ACCC found that the federal government’s childcare affordability reforms introduced last year (Cheaper Child Care) reduced the cost for families between 8.8 and 13.8% but the cost of childcare had increased by over 22% over the past 5 years for families and those savings have been absorbed by
increase fees yet again.<\/p>\n\n\n\n\n
The industry comprises approximately 13,370 businesses with the top 4 operators generating less than 40%
of the industry revenue which leaves 60% of the revenue being generated by smaller operators.<\/p>\n\n\n\n
The income\/return to freehold owners in the sector remains steady from 5% to 8% with good capital growth. This will improve once interest rates reduce. These are excellent returns compared to current commercial\/retail property yields in the order of 2.5% to 4%.
One issue for freehold investors is that bank funding has become tighter however there are now second tier lenders who are open to lend and also private investor funds. The Banks currently lending on freehold ELC\u2019s are the CBA and St George with others tightening their finance criteria
With good returns and long leases generally at least 10 to 15 years with options and the need for centres to meet the NQF and operators underpinned by government subsidies they are an attractive long time set and forget investment.
A recent report issued by CBRE commented that even in the face of higher interest rates and living costs the sector for investors remains steady and attractive driven by scarcity of new centres being built and with the rising cost of construction and replacement costs increased by nearly 40%, that is applying pressure on property values across most real estate sectors.
CBRE also are of the view that for investors there will be further yield compression as supply decreases and new childcare centres decline. It becomes a matter of limited supply and demand so it is unlikely investors will get yields of 6% in metro locations across Australia.
Investors should also consider despite the lower yields to take into account with new centres the benefits of depreciation, replacement costs, and comparing returns elsewhere which can increase the benchmark return on investor capital of up to 15-30% once depreciation is factored in.
Many investors are looking solely for a positive cash flow investment due to debt costs however buying a high-quality new centre on traditional borrowing parameters with a yield of 5% will still result in positive cash flow which will increase as interest rates reduce, along with the increased capital growth benefits. The average metro yield is now around 5.% to 6.30% with the current average rent per child around $3,000 per child and centres operating with 80 and 100 places.<\/p>\n\n\n\n
Key issues to be aware of:<\/p>\n\n\n\n
If the lease 15 years or more and the landlord requires the tenant to contribute to any of the improvements the Lease may fall outside of the Retail Leases Act 2003 (Vic), and the protections under that Act for the operator\/ tenant do not apply.<\/p>\n\n\n\n\n
i. The Landlord can legally still have an underpinning (ratchet clause) on a market rent review. This is illegal if it is a Retail Lease.
ii. Landlords can recover Land Tax (single holding rate) which is not possible if a RLA lease and this has become a major issue in Victoria as Land tax rates have increased significantly for landholders
iii. The Landlord can charge the tenant legal costs to prepare and negotiate the lease.<\/li>\n\n\n\n
i. There are less protections to a tenant if the Retail Leases Act does not apply as it becomes a commercial lease and subject solely to the terms agreed.
ii. There may be no right to seek a mediation via the Small Business Commissioner to resolve a dispute that arises.
iii. The rent increases at market may not be genuine market reviews and the terms of the Lease (if NOT a RLA lease) need to be carefully reviewed.<\/li>\n<\/ol>\n\n\n\n
We recommend that annual rent reviews for a tenant be set to say a fixed 3% or 4% per annum which means that the tenant can budget for that increase and those increase should keep the rent in line with a market review when it occurs in say 5 years\u2019 time.<\/p>\n\n\n\n
Often, we see an AFL which has sketch plans attached which is a risk to the tenant as to what will eventually be delivered so we suggest that the AFL provide for detailed specifications as to what a landlord will deliver to the tenant at handover, as far as infrastructure, services and landscaping.<\/p>\n\n\n\n\n
\n
Sanicki Lawyers Services
We are experienced in the industry and can assist clients in all aspects from new and existing operators,
Leasing, Employment issues, partnership and shareholder or JV agreements and the sale and purchase of
centres. We advise property Investor clients acquiring freeholds and know what issues to look for.
We know the industry and have a network of consultants to assist our clients as investors , and operators in
the ELC sector.There is no substitute for expert and experienced legal advice!<\/li>\n<\/ol>\n\n\n\n
Contact: Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist |
robert@sanickilawyers.com.au | mobile \u2013 0412 67 37 57<\/p>\n\n\n\n\n\n\n\n\n\n\n\n
\n\n\n\n