The Federal Government's decision to limit negative gearing to new residential builds and overhaul the capital gains tax discount has pushed many property investors out of the housing market and into commercial assets. The recent ban on self-managed superannuation funds using limited recourse borrowing arrangements to purchase residential property has added further pressure by closing off another avenue that investors have traditionally used to build wealth through housing.

All that investment capital needed somewhere to go and, according to Stonebridge Property Group, childcare is where a lot of it has ended up, leading all commercial sectors in year-on-year transaction value growth at 14.2%.

A new type of landlord has entered childcare investment

The incoming wave of investment is creating two distinct types of childcare property landlords, each presenting their own challenges for operators who lease.

The traditional landlord – typically a private investor or institutional fund – may have held the asset for years and built an established relationship with the tenant. The risk for operators is not necessarily the landlord themselves, but what happens when they sell. When a long-term holder decides to exit into a strong market, the operator has no say in who buys the asset or what that new owner expects in return.

The ex-residential landlord is a newer and perhaps less predictable presence in the sector. These are investors who have made a deliberate decision to move into childcare property, drawn by data like strong occupancy rates, government-backed revenue and long lease terms. Unlike a landlord who has held an asset for years and built a relationship with the tenant, this cohort is entering the sector with commercial expectations from the outset. They are also less experienced with commercial leases, which can create uncertainty around net lease obligations, rental rate increases and make-good provisions. But they bought into this asset class because the numbers work, and they are unlikely to leave money on the table at renewal once they understand the market.

Buying means not worrying about a landlord

An operator who owns their premises is unaffected by either landlord type. There is no lease renewal, no rent negotiation and no exposure to a change of ownership. As both landlord cohorts drive up competition for childcare assets and place downward pressure on yields, owner-operators hold an appreciating asset rather than an escalating cost in the form of rent.

 

According to Stonebridge Property Group, the freestanding commercial market is expected to remain highly transactional over the next 12 months as new investors continue entering from the residential market. Operators who act now are buying ahead of that competition, while those who wait may find themselves doing so in a more competitive and expensive market.

 

Owning your premises is one way to step outside the landlord dynamic entirely. If that is something you have been considering, Ligo Finance works exclusively with childcare operators to structure the finance that makes it possible. Get in touch today.

 

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