Thematic Property Investing: Episode 2
What is Thematic Property Investing?
The process of identifying long-term trends that you think will shape the future and investing in them.
Muse Capital has developed a range of themes that support our investment strategy. We are choosing to share these themes by regular episodes on our thoughts; our second episode covers why we are investing in Childcare Centres.
Childcare Centres - Why do we like them?
Landlord Friendly Lease Structures
Muse Capital Directors and Partners have spent the majority of their working careers negotiating leases. True real estate value is unlocked from the strength of a lease; Childcare Centre leases consistently outperform other asset classes such as Office, Retail, Industrial, Hotel and Residential.
A 10-15 year lease with options is typical in Childcare, whilst most Office/Retail leases average 5 years and Residential 6-12 months. Childcare leases provide investors with a greater level of certainty over tenure and importantly limits periods of lost rent due to vacancy, maximising overall returns.
The majority of Childcare leases are "triple net", essentially meaning that all property outgoings are covered by the Childcare operator. This includes Rates, Land Tax, Energy, Water, Insurance, Repairs & Maintenance, Gardening etc. The investor therefore receives a true net return on costs with little to no capital expenditure required.
Value of Childcare Business is Tied to the Property
At lease expiry, a normal Office/Industrial/Residential tenant is able to consider a number of potential relocation options. They are generally deal motivated and will seek to create leverage with their landlords to drive the best deal possible.
Childcare tenants act differently. They have a licence issued by the Department of Education that is specific to the property and goodwill established with parents that they seek to preserve. The value of their business is tied to the property. In the event Childcare tenants seek to exit a centre, they generally re-negotiate a longer term lease in order to on-sell the business to another operator.
The vast majority of Childcare Centre landlords enjoy 100% tenant occupancy for >20 years.
Population Growth
Australia's average population growth is consistently one of the highest of any OECD countries. Looking at World Bank data, Australia grew by 1.59% in 2018, double that of many other countries, including the United States (0.7%) and the United Kingdom (0.7%).
South East Queensland has consistently outperformed the Australian population growth rate. In the 10 years to 2018, the population has increased by 2.3% per annum.
A growing population means there will be demand for Childcare places. We are backing South East Queensland to continue to outperform Australia and the OECD for population growth, continuing the demand for Childcare into the future.
Shift Towards Earlier Education
0-4 year old long day care participation rate is currently at 35% in Australia, growing annually by 2-3%. New Zealand is already well ahead of Australia, up 14% over the last 5 years to 41%. Australia is well behind many other countries who have near mandatory enrolments by age 3 including the UK/Israel (100%) and France/Norway/Spain (all >95%). There is enormous scope to increase the total number of children in care in Australia to 100% participation.
Research proves that children who enter Childcare from the age of 3 outperform when they start school compared to those that don't attend Childcare and that the benefits are long lasting. Muse Capital believes that education dynamics will continue to improve (as they have continued to do throughout history) and thus further increase demand for Childcare places into the future.
Government Backed Sector
Providing Childcare positively contributes to economic growth and ultimately produces net savings to Government. There is a clear financial benefit for Government to continue to support parents. Negative changes to Childcare are highly contentious, with major parties seeing Childcare as a key battleground to garner votes.
Liberal Policy - Introduced "New Child Care Subsidy" from 1 July 2018. No cap on childcare for families earning under $186k, with families earning between $186k-$350k capped at $10,000. 800,000+ families are now $1,300 better off as a result, creating an increase in the participation rate.
https://www.liberal.org.au/our-plan/families
Labor Policy - Pledged to increase funding by $9.8 billion over the next 10 years including a minimum 15 hours per week for all children aged 3 and 4. This would be the biggest policy shift for the industry, creating an exponential increase in growth.
https://www.abc.net.au/news/2018-10-04/labor-to-fund-3yo-preschoolers-if-elected/10336718
Muse Capital is of the firm belief that both major parties will continue to strongly back funding of Childcare well into the future.
Encouraging Women Back to the Workplace
Childcare is vital to the Australian economy through removing barriers to entry to employment and increasing the size of the labour pool, predominantly for women.
Female workforce participation has now surpassed 60% for the first time, with 48% of all families with children under 12 on dual incomes. Both these figures increase every year.
Muse Capital believes that there will continue to be progress on gender diversity and gender equality in the workplace. There is a direct correlation with increased participation in the workplace with the availability of childcare.
Human to Human Contact
Childcare is fundamentally a human interaction - we don't believe there is a foreseeable technological threat to the industry that would affect property values and/or negate the need to have quality human care.
Next Opportunity
Since our first Childcare acquisition in Helensvale, Muse Capital has now assessed a further eight potential Childcare Centres. Only two of these meet our stringent investment criteria. We invest alongside our investors in every deal we establish - we want to ensure only the best opportunities are presented providing the right balance between sustainable monthly returns as well as long-term capital growth.
Please stay tuned for our next acquisition announcement in the coming months and we look forward to your continued interest.
Finally, if you have a friend or family member potentially interested, we'd love to hear from them. Please feel free to share our newsletters.