Australian Unity has established a Childcare Property Fund for wholesale investors with a view to building a $250m Fund over the next 3 years.
The Fund adds to Australian Unity’s social infrastructure ethos and follows investments into Retirement Villages, Aged Care facilities, Disability Accommodation and Healthcare funds.
The childcare sector has remained resilient through the global pandemic. After initial challenges experienced in early 2020 the Department of Education has reported that child attendance at centre-based day care has returned to pre-pandemic levels. Considering the centres the Fund owns, child attendance numbers have remained strong between 75% and 100% occupancy.
The Australian childcare market has been a sought-after real estate investment class over the past five years, with favourable demographics and increasing utilisation rates helping to stimulate investor appetite. This attention has increased throughout the pandemic generally increasing prices for childcare centres and compressing yields. The average national yield as measured in mid-2021 was 5.33% (including regional and metropolitan assets). There has been evidence of yield compression of major portfolios, with some auction listings for newly completed assets in the low to mid 4% range.
Following the initial capital raising of $35.78 million the Fund has settled on an initial portfolio of 7 assets with a future pipeline of opportunities secured for the next phase of growth. The group is now seeking to raise a further $40m to fund the pipeline and have issued an Information Memorandum on 3 March 2022, offering investors a 4.6% – 6.5% income yield and a total return of 10% pa (post fees).
Australian Unity continue to see good value opportunities working to acquire operating centres, perform refurbishments, and participate in fund-through opportunities to build new centres.
There is a mixture of economic data at present suggesting that increasing inflation could lower childcare centre prices, however, increased investor appetite for social infrastructure assets and perceived headwinds for traditional real estate assets classes (office, industrial, retail), has continued the strong demand for childcare real estate which is yet to see any downward valuation pressure.
Recent announcements in the 2021/2022 Federal Budget are expected to support underlying demand for childcare services going forward. The government is expected to spend $11 billion on child care funding in 2022/23, up from $10.7 billion this current year and has improved affordability of childcare for low- and middle income families. Childcare subsidy increases were brought forward from 1st July , as part of the $1.7 billion provided in last year’s budget to remove of the annual cap on the child care subsidy and increased subsidies for second and subsequent children. This is expected to save around 250,000 families on average $2,260 per year, depending on their household income and the number of children in child care.
This along with other childcare funding increases highlights the continued Government support of the sector as core social infrastructure required to support labour force participation (in particular female workforce participation), generate tax revenue, reduce reliance on welfare, and significantly contribute to the educational goals of the country.
Fund Overview
| Responsible Entity | Australian Unity Funds Management Limited |
| Custodian | Perpetual Nominees Limited |
| Fund Manager | Australian Unity Funds Management Limited |
| Fund Size Target | $250 million within 3 years, with no cap on growth |
| Target Capital Raising | $40 million |
| Fund Open | 1stApril 2022 |
| Fund Raising Close | 31 May 2022 |
| Fund Term | 5-year initial term |
| Target Return | 10% Equity IRR |
| Liquidity | Illiquid -Liquidity facility expected to be available at the end of financial year 3 and year 5 |
| Investor Type | Wholesale – Minimum $50,000 |
Fund overview
The Fund primarily invests in a diversified portfolio of childcare properties including established properties and development assets. Exposure to childcare properties may include direct property, unlisted managed funds, listed childcare REITs, property
syndicates or companies that mainly hold childcare property.
The Fund may invest in property assets related to its childcare assets, for example; fixtures and fittings, adjacent real estate and real estate with complementary uses.
The Fund may also, from time to time, provide loans to childcare operators secured by real property to assist them with funding the fitout of the Fund childcare properties.
The Fund manages its liquidity by holding cash and listed REITs.
Fund strategy
The Fund aims to provide investors with stable secure income, capital growth and social impact investing credentials through:
- Enhanced income sustainability through leveraging partnerships that share Australian Unity’s corporate values.
- Portfolio diversification supported by socio-demographic analysis.
- Targeting ongoing portfolio performance by focussing on assets with the following attributes:
- Dominant centres with limited competition driving high tenant retention rates
- Sound lease fundamentals securing stable income
- Acquiring assets at below market value with potential economic uplift
- Contribution to the quality of Australian childcare centres and early childhood education from:
- Refurbishment and improvement of centres
- Strategic partnerships to deliver new contemporary centres
- Engaging with quality tenants that have high educational standards
The Fund has a review mechanism in Year 5 and (subject to unitholder review) to consider the exit options for investors. Australian Unity may offer to convert the Fund to an open ended vehicle with liquidity events and staged capital raisings to support on going growth of the Fund.
Rationale
Australian Unity are attracted to the sector by the demographic and social changes in society which are driving parents to take up Early Learning opportunities at high growth rates. By 2030 it is forecast there will be 220,000 more pre school
children (0 4 year olds ) growing at a rate of ~1.0% annually with overall usage of Long Day Care increasing since the start of the pandemic by 2.4% (~19,000 children) from Q4 19 to Q1 21.
Australian Unity also see the benefits of the strong backing of the operators by the Federal Government who directly funds the vast majority of fees payable to Childcare operators. In FY22, the total Government commitment to the sector is $9.5 billion. The 2021-22 Federal Budget includes two significant changes to the Child Care Subsidy (CCS) aimed at increasing both child participation in early learning and workforce participation by providing an additional $1.7 billion in payments to:
- increase the rate of CCS for families with more than one child
- remove the annual cap on the amount of CCS that can be paid for families with incomes above $189,390
All major political parties support childcare funding which has been shown to provide a GDP multiplier of 2x the amount of expenditure by the Government due to the manner in which it allows, predominantly women, to return to the workforce sooner.
Existing Portfolio
The Fund was established in December 2021 with an initial capital raising of $36m, sufficient to fund the initial portfolio of 7 assets as shown in the table below. The Entry Price for new investors recognises that the assets are held by the Fund at their acquisition price which reflects an attractive initial yield of 5.84%. The assets were acquired on favourable terms and settled within the last 3 months and as such have not been revalued for the purposes of the capital raising.
The existing portfolio offers a WALE of 14.9 YEARS with leases typically containing two 10 year option terms. Annual rental reviews are typically fixed at 3% per annum.
The assets are located in good catchments with strong socio-demographic demand drivers, which Australian Unity see as pre-requisites to any acquisition.
Australian Unity have a further 13 assets in exclusive due diligence valued at $68.9M and offering a passing yield of 5.6%. Further information on these assets are available in the attached documents.
The new Centres (if all acquired) will provide further diversification to the Fund with 5 assets located in Victoria, 3 in Western Australia, 2 in South Australia and 1 in Tasmania.
The Fund will remain patient in sourcing opportunities in NSW (where passing yields are often below 5%) and only participate where the opportunity to acquire an asset offers strong relative value for the Fund.
Limited withdrawal facility
The Fund should be considered as illiquid and has limited opportunities for investors to withdraw their investment. The Manager intends to offer investors an exit opportunity in Year 3 and Year 5. The terms of the withdrawal opportunity are yet to be determined, however Australian Unity has suggested that a period of consultation with investors will take place ahead of the exit dates to determine the scope and depth of the requirement.
Fund Fees
Australian Unity are entitled to receive fees in consideration for establishment and management of the Fund including;
- Equity Raising Fee: 0.75% of equity raised
- Debt Establishment Fee: 0.35% of debt raised from time to time
- Acquisitions Fee: 1% of the purchase price of direct assets
- Management Fees based on 0.75% of the Gross Asset Value (GAV) of the Fund
- Costs and Expenses: 0.3% p.a. of GAV (est)
- Development Management Fee: 1% of the development costs of direct assets
- Disposal Fee: 0.5% of the sale price of direct assets
- A Performance Fee of 15% of the Fund’s outperformance above a 10% IRR.
- Buy Spread: A buy spread of 2.00% will be applied to the issue of Units
The above fees are slightly higher than market practice.
Return Objective
The fund is seeking to provide a distribution yield of 5.5% – 6.5% pa and a total return of 9% – 10% IRR over a 5 year period.
The Funds’ listed peers include the Charter Hall Social Infrastructure REIT and Arena REIT. Charter Hall has a forecast distribution of 17.2cps, which on today’s price equates to a 4.2% yield and Arena has a 16cpu distribution forecast which reflects a 3.2% distribution yield at todays price.
There are several unlisted peers including KM Property Group (currently open), Primewest, Fawkner Property Group, Chauvel Capital (In which the author has an interest) Correda Property Group and Accord Capital, each with varying attributes.
Recommendation
We support the investment strategy adopted by Australian Unity and recommend the Fund for further consideration by investors seeking an average distribution yield from property underpinned by the daily needs of people in local communities, particularly with tenants heavily supported by Federal Government funding. The prospects of significant capital growth from further cap rate compression is less certain in the current stage of the cycle.
Further Information
Further information on the Fund can be found in the attachments to this article and via the Australian Unity Webinar access via this link. Investment should only be considered after further discussions with the Manager and a thorough review of the investment materials.
We do not receive any commercial benefit from Australian Unity for this review. We would be happy to assist interested investors who may want further due diligence services.
Disclaimer: The information contained on this web site is general in nature and does not take into account your personal situation. You should consider whether the information is appropriate to your needs, and where appropriate, seek professional advice from a financial adviser.
Related Articles
