Investment Without The Sole Ownership Hassle
The early education and healthcare sectors are presenting some interesting options, writes Sally Lindsay.
1 July 2022
New Zealand’s young and ageing populations are driving investment in commercial property occupied by early education and healthcare centres, such as daycare, medical practices and specialist health businesses.
Property investment company Erskine & Owen director Alan Henderson says properties used by specific sectors such as early education and healthcare can command a premium for rental space, making it an attractive option for residential investors wanting to step into commercial investment without the hassles of owning a property outright.
“With an increasing number of New Zealanders in the older age bracket it means this demographic has ongoing healthcare needs that help to significantly underpin the revenues of the tenants in these types of buildings,” says Henderson.
According to Stats New Zealand the number of people aged 65+ doubled between 1991 and 2020, reaching 790,000. By 2034 it is expected 1.2 million people will be aged over 65.
People are living longer, creating increased demand on services across the board, but especially in the healthcare sector. Total healthcare spending by the government totalled $20.5 billion in the 2019/2020 financial year, and more was committed in the May Budget.
Henderson says there is a strong need for quality buildings to accommodate businesses for the long term to ensure they can service growing communities with an older population.
“Investment in healthcare property is also resilient to impacts of future pandemic outbreaks, making them in demand as long-term investment options,” he says.
Erskine & Owen is among a limited number of property investment companies setting up a fund to invest in healthcare facilities.
It’s buying a property in Havelock North, Hawke’s Bay, as the first one for its new Healthcare Properties Fund LP. The fund is raising $3.85 million, along with bank finance, to purchase the $6.6 million property. It is predicting a cash return of 5.75 per cent per annum. Further healthcare properties will be added to the fund in the future.
Henderson says Hawke’s Bay is a popular destination for Auckland retirees who sell up and want a more relaxed environment while still having access to good shopping, entertainment and outdoor activities.
Rents Track Upwards
“In an area such as Havelock North commercial land for development is limited, meaning high quality premises will be in demand and rents will continue to track up due to low supply of new premises.”
The Havelock North healthcare facility was purpose-built in 2000 and has eight healthcare-related tenants, including Te Mata Peak Practice and Bay Audiology. The eight tenancies have a weighted average lease term of 6.21 years.
“With a growing demographic requiring a wide range of healthcare services, the Havelock North property has many of those services all in one place,” says Henderson.
Specialist investment sectors such as healthcare and early childhood centres are becoming increasingly appealing as an alternative to traditional commercial property.
“Industrial has been the darling of the commercial investment sector, but rising interest rates and a clampdown on lending to developers by banks are causing a slowdown in the industrial, office and retail sectors.
“People will always need medical and daycare services.” Henderson says there is solid demand in regions such as Hawke’s Bay and Waikato where the population is growing, and major residential development is underway.”
Sectors such as daycare and healthcare also attract significant government funding, have longer lease terms, and tenants are less likely to relocate due to specialised fitout requirements, particularly for medical premises.
Investment in daycare property is often considered attractive due to the long-term leases in place.
As an example the new Enderley property the company bought for its NZ Daycare Properties Fund LP has an initial lease of 18 years.
“The sector has long lease periods to provide stability given the important role these businesses play in supporting the existing community and future development in these areas,” he says.
“For investors, the long-term nature of these leases could assist in providing more certainty in terms of future income streams.”
Henderson says ongoing government funding support for the early childhood education (ECE) sector provides additional appeal.
The 2020 government budget committed $278 million over four years to fund ECE services employing fully-qualified staff. This coincided with the number of children enrolled at education and care services increasing from 63 per cent in the 2015 ECE census to 69 per cent in 2020.
“ECE subsidies help to underpin tenant revenue and there is significant value associated with the Ministry of Education licence on these sorts of premises,” says Henderson.
“The key role daycare plays in childhood development and the future growth of communities is a significant attraction for a growing number of investors. It is also attracting investors who have a passion for supporting early childhood education.
‘Investment in healthcare property is also resilient to impacts of future pandemic outbreaks’ Alan Henderson
“They can give something back to the community, make a positive impact on young children’s lives by ensuring they have the best start possible before going to school, and still make a competitive return on their money,” he says.
Erskine & Owen’s first early childhood syndication was released in 2020. Made up of five early childcare centres valued at $15.55 million, the Daycare Properties Fund LP has delivered on forecasted returns during one of New Zealand’s most turbulent economic periods.
The latest addition to Erskine & Owen’s new NZ Daycare Properties Fund LP is the purpose-built centre operated by Rainbow Corner in Enderley. The fund LP is raising $3.45 million through the issue of 3,450,000 units at $1 each. The capital, together with bank finance, will be used to purchase the $5 million Enderley property, with a projected (pre-tax) 6.25 per cent per annum cash return.
Henderson says the property was chosen because it is in an area with strong future development plans and a population that utilises daycare services.
The Enderley property joins the fund’s initial property, another daycare centre located in Hamilton’s Burbush area and also operated by Rainbow Corner. The fund has delivered the projected pre-tax return of 6.25 per cent since inception.
“We are focused on buying properties that are purpose-built centres in high growth locations where there is an ongoing need for quality early childhood education.”
The minimum investment in both funds is $50,000. Investment is available only to wholesale investors, those who qualify as an experienced investor under the Financial Markets Conduct Act.