A whopping 326 childcare centres opened around Australia in the past year in a substantial overshoot by developers and operators given it was just three years ago that new parents faced a severe shortage of places.
It has left many childcare operators grappling with a big oversupply after an avalanche of new centres came on stream, with special offers of free iPads to parents or paying for the week’s groceries used as novel ways to entice families.
A big step-up in taxpayer subsidy to the $13 billion sector seems to have driven the oversupply, while some property developers have been found guilty of building new centres without closely watching the supply pipeline already in train in some capital city catchment areas.
A new means-tested childcare subsidy payment system was implemented on July 1 by the federal government, which leaves most families better off. Childcare subsidies cost taxpayers about $7 billion annually now and this is projected to rise to $9.5 billion by 2022.
The government was forced to respond to a clamour from the community for more support. Households already battling with high electricity bills and punishing mortgage payments at a time of sky-high property prices wanted to know the government was on their side as female participation rates in the workforce climbed and 400,000 new jobs were created in Australia in 2017.
But the big swing from a shortage to oversupply has been rapid. Media headlines in 2015 screamed “Pick up a childcare enrolment form with your pregnancy testing kit”. The shortage was biting particularly hard in inner-city suburbs at that point.
For shareholders in G8 Education, which runs 500 childcare centres in Australia and a handful in Singapore, it’s been particularly bruising with almost $1 billion in sharemarket value having vanished in the past nine months as the share price tumbled from $4.42 in early December to $2.12 on Friday.
G8, which has more than 20 childcare brands including Headstart, Jellybeans, Bambinos and Penguin Childcare, made investors wince some more on August 27 when the company announced a 22 per cent drop in net profit to $23.7 million in the June half. Alarmingly, occupancy rates dropped to 70.1 per cent from 72.6 per cent a year earlier. With 41,000 licensed childcare places across its business, this meant more than 10,000 spots were unfilled in its centres.
G8 Education chief executive Gary Carroll is convinced that size and scale is important in the industry, and expects a balance between supply and demand will happen by mid-to-late 2019.
It’s been the human equivalent of a mining boom. Mining companies are notorious for all jumping in at the same time when a shortage in a commodity is apparent. But the longish lead times and not knowing what rivals are up to invariably leads to an overreach as new supply comes on with a rush at the same time.
A spike in childcare supply emerged in early 2017. A staggering 326 centres opened in 2017-18, far in excess of industry averages, and about 30 per month are projected to open for the rest of calendar 2018.
The biggest supply injection happened in NSW and Victoria. Australia now has 7282 long daycare centres according to one of the biggest owners of childcare centres, Folkestone Education Trust. It owns 387 childcare centres, tenanted by about 30 different brands. Australia had about 6000 long daycare centres in 2010.
But Folkestone remains one of the disciplined players in the industry, and cautions against too much doom and gloom, because quality childcare operators are in strong demand in their own suburbs and the industry dynamics mean that a temporary oversupply will be soaked up, but perhaps not for another 18 months. Its share price has been remarkably steady, and at $2.75 is at the same level it was a year ago.
Not a ‘commodity’
Nick Anagnostou, chief executive of Folkestone Education Trust, said a high-quality centre that catered to the needs of families in its catchment area and where investment in equipment, building and educational programs had been made, would thrive. A one-size fits all approach doesn’t wash.
“Childcare isn’t a commodity, just like any other form of education. Operators that treat it as such will have, by definition, lower take-up levels than those who adapt to their individual catchment’s needs,” he said.
Parents were also smart enough to bypass short-term enticements. “New supply can add some pressure, but parents will inherently choose quality over short-term incentives,” Mr Anagnostou said.
He also said it was important to realise that some centres were nearing the end of their life. “Some centres are now obsolete and will have reached the end of their life cycle, but that isn’t new.”
Families want well-looked-after centres. “Parents expectations have evolved – they’re paying a lot for childcare. There needs to be the right operator whose actively engaged with the expectations of their catchments, not just providing the same offering, irrespective of location.
The big-picture demographic shifts of population growth, more workforce participation by females and an expanding economy would continue to fuel long-term demand. The number of dual income families is increasing. The latest available figures from national regulators show that in mid-2017 37 per cent of children aged between 0 and 5 were using long daycare services, up from just over 31 per cent in 2011.
Mr Anagnostou said the best operators in the best locations were sitting pretty. “Like any industry, there will be those who can capture that, and some who will find it harder.”
Dean Clarke, the chief executive of Mayfield Childcare, which runs 19 centres in Victoria, said there was an increasing number of centres being offered for sale. He has seen some centres from rivals opening up without any customers initially.