Why is Childcare So Expensive?
The dominant narrative in the childcare industry is childcare scarcity, Australians just do not have access to affordable childcare. We are performing significantly below international standards, as countries with similar cultures and childcare systems (UK, New Zealand, Ireland and Canada) all have moved to providing at least two years of preschool free for families. In Australia less than 30% of children attend any form of preschool programs.
So where is the upward pressure on fees actually coming from?
The two biggest component of expenses in Childcare are wages and rent.
Community ran centres under city councils are likely to spend around 80% of their income on wages and 5% on rent while private operators spend anything between 50%-70% of revenue on wages and 10%-20% on rent. Goodstart Early Learning — the biggest player in the industry at 9% market share spends 69% of income on staff and 18% on rent. G8 (7% market share) spends 55% on staff and 11% rent. Affinity Education (<2.5% market share) spends 63% of income on staff and 15% rent.
Looking at the big picture, there is an affordability issue because centres have to cover wages and rent. But the much bigger issue is that the building itself contribute to the affordability issue. This is how the childcare property market looks like:
Property developers → sells to childcare property owners→ leases centres to childcare operators (eg G8, Goodstart, Guardian etc)
Property developers build centres at an average price of $1.6m — $2m and sells them to childcare property owners. The two biggest childcare property owners are Folkestone Education Trust and Arena REIT. They are are the two biggest REIT specialising in early learning real estate.In 2017, Folkestone’s 406 centres made $122.2 million while Arena REIT made $28.7 million from their 198 properties in early learning. These owners of childcare properties buys properties at an average price of $4million. They keep hold of their land and lease these properties to childcare operators. By doing so they can expect an annual yield of 5%-7%, this mean there is competition in buying up childcare properties. This build and rent business model is growing, and inevitably forcing childcare operators to be willing to sign 10 year leases with increasing rents every year. For the bigger listed operators, maintaining share price becomes an important factor. They then become more focussed in achieving greater year-on-year returns than demonstrating long term financial sustainability. Hence, childcare operators are racing to expand either through acquiring existing smaller players or opening up new centres. Premium rent becomes a lower priority in this decision. However their ability to pay higher rents also affects the rest of the childcare property market. Increasingly, cash-strapped councils have also started to look at the private market to rent their children services at market prices, increasingly this pressure might also force community services to match the market rent. With increasing rents on childcare properties, childcare fees will only increase in the future.
Secondly, the cost of wages in childcare which can cost up to 70% of revenue also result in higher fees to parents. However, childcare workers are not the ones seeing the benefits of the high fees. In fact, tomorrow thousands of childcare workers will go on strike to demand a 30% increase in pay. Average wages of childcare workers with a certificate III are paid an hourly award rate of $21.29, which is nearly half the average Australian wage of $42.84 per hour. Early childhood educators are among the lowest paid Australians. The chart below shows a stark comparison:
When childcare fees are so high, people do not realise that childcare educators are getting paid so low. The current wage levels don’t reflect the change over time from the notion of child minding to one of early child development, care and education. Last month, I wrote about how increased regulations around educator qualifications and tighter staff-to-child ratios have put upward pressure on payroll costs. This is not to say childcare educators should not be paid more. In fact they should, and centres who want to keep quality educators will have to pay above award rates for their educators. However about 70% of early childhood educators are award dependent, compared to only 20% of the broader Australian workforce. This is because a rise in pay would cause difficulties for childcare operators if they aren’t able to transfer those over as fees. Australian families, already about 35 per cent of their private income on preschool programmes in Australia.
Different funding models
Operators income come through a combination of parent fees and government funding. Preschools budget come mainly from the government and is linked to operational costs such as wages. However, long daycare services do not receive operational subsidy. Instead their funding is linked to parents fees which are designed to offset the cost of care for families. Hence wage increase and rent increase are more likely to require increased parent fees.
There should be greater public investment in education and care to enable better affordability to quality care and education for children. What might result from the strike is hard to predict but it is already building awareness of longstanding challenges and complexity in early childhood education. If operators are not able to look to the government to reduce operational costs, they should be looking at increasing operational efficiencies in better managing their overall payroll costs.
