Valuation of Child Care Centres in Sydney and Australia – A Valuer’s Perspective.

“May I personally thank you for all of your assistance, and particularly for the pleasant, professional and efficient service you have provided to us in this matter regarding the valuation of the pre school and child care centre.”

Damien McKay – Solicitor 

Institutional investors have had a substantial impact on the child care property segment over the recent past. The cost and time taken to pursue development and licensing for new centres suggests that new privately owned entrants into the industry may be restricted and institutional entrants seek to acquire and operate existing centres to gain geographical market share rather than pursue fresh development. This is more evident in densely populated inner city areas.

Capital available to institutional investors and operators also make it difficult for new, private entrants to compete on the basis of economies of scale, scope of services and level of equipment and facilities offered at institutionally developed or run centres (Colliers). Parents consider these facilities and services when shopping around for the best centre for their child. This makes it difficult for smaller private operators to maintain occupancy and the revenue required to meet compliance requirements and maintain facilities.

In the past child care centres have sold at higher yields than more traditional asset classes such as office, retail and industrial, indicating a higher level of required reward for the risk that buyers saw fit for this asset class. In more recent times, yields have decreased and have ranged between 3.9% and 7.3% according to Colliers research. More recently leases tend to be long (over 10 years and up to 20 years) with option periods. Additionally, Government support of the industry along, barriers to entry and development restrictions have reduced perceived risk and yields.

Child care centres are required to meet certain compliance requirements including those of site area, qualified staff, facilities and health and safety. This may restrict the number of inner city and urban centres due to a lack appropriately sized or improved sites. This can increase occupancy rates, revenue and value of established sites in these locations. On the contrary regional centres in locations with opportunities for greater property size and improvements may be oversupplied with lower occupancy rates partly due to the above issues and partly due to the demographic qualities of these areas with more stay at home parents and lower mortgage repayments (Colliers). The success of regional centres can depend on urbanisation and changes to demographics in their catchment areas. It is for these reasons that the location of a child care centre in contrast to its competition in the same catchment area is paramount to its present and future success and subsequent value.

Child care centres are vital to the community and are highly scrutinised by state and local planners. The balance between the availability of services and the profitability of existing services to enable them to provide high quality care and facilities is a major consideration of local and state governments.  When considering new proposals planners may consider the quality and compatibility of proposed centres with neighbourhood land uses; adequate and safe parking; integration into the surrounding development; maintaining amenity of surrounding neighbours; retention of vegetation and significant development.

Valuations of child care centres are performed for a variety of purposes and are either strategic or administrative in nature. Strategic valuations of child care centres may be required for the sale or purchase of going concern, freehold or leasehold assets. Landlords and owners of child care centres may also choose to request valuations to ensure that their site is being used at its highest and best use. An example of this may be if a more modern and better centre opens nearby and occupancy and revenue drops the higher and best use of the site may be another use such as  residential – a situation where it is more economic for the owners to develop the site into a residential dwelling. Valuations of an administrative nature may be required for insurance, taxation or balance sheet purposes.

When undertaking a child care centre as a going concern valuation the Australian and New Zealand Valuation and Property Standards suggest that trading figures should be considered. The most appropriate method of valuation in this case is the capitalisation of net profits. The valuer would consider the source and consistency of the trading figures and consider making adjustment to these figures based on their understanding of the business. Specialist knowledge and a sound understanding of accounting is required for this process.  Adjustments to trading figures may reflect owner’s roles in operating the business or abnormal seasonal profits.

Australian and New Zealand Valuation and Property Standards suggest that valuations in relation to going concern properties should identify the interest valued as going concern (walk in walk out plus stock at valuation), lessor interest (sometimes known as freehold) and lessees interest (sometimes known as leasehold). The capitalisation rate is usually produced after examining market transactions and having regard to the relationship between sales price and adjusted net profits of a comparable sales item.

Sometimes a situation may arise where a child care business operates independently from the property in which it is located, thus the property and the business interests are different. In these cases the lease is a key document that needs to be assessed by the valuer. The valuer contrasts the lease of the subject to that of comparable sales and may make adjustments to reflect the subject lease terms in contrast to market sales evidence. These adjustments may include items such as incentives, outgoings or use of improvements under the lease. The appropriate primary method of valuing a property only component of a child care centre may be via the capitalisation of rent with the capitalisation rate being computed with reference to the relationship between sales price and net rents of comparable market evidence.

A valuation report for a child care going concern, freehold or lease hold will have careful regard to the town planning, demographics, competition, site detail and improvements associated with the business. The overall profitability of the subject centre contrasted to that of surrounding competition and sales evidence needs to be considered – just because a centre charges more per child and has better improvements does not mean that it is overall more profitable – this all depends on the centres good will, its occupancy rate, fees collected, business or property expenses. These and other factors may be considered in a cross check method of valuation which may be the direct comparisons approach – where recent sales evidence is analysed and compared to the subject property with appropriate adjustments considered.

A feature of vital importance for the valuation of a child care centre is its licensing and development consent. Often the capacity of a child care centre is used as a cross check method. The licensing terms and the particular business functions of the subject property must be compared to other sales evidence. Child care services and associated regulatory licensing may include Long Day Care, Family Day Care, Preschool, Occasional Care and Outside School Hours Care. To make useful adjustment and comparisons a valuer needs to have regard to the type of licenses and permits that the subject centre holds along with what the comparable sales evidence permits are. A variety of services and permits may make a centre more flexible to demographic change in the area and attract a variety of different fees and government rebates – all factors that need to be considered when valuing child care assets for strategic and administrative purposes.

Edmonds Associates Valuers have a 40-year history of providing going concern valuations and valuations of specialised asset classes for institutional, SME and private owners and investors. For more information on going concern, business and real property and business valuation including child care centres please do not hesitate to contact our office.