Authors: Ryan Danaher, Sam Lipshut, Doug Shorten, Martyn Boyle and Joshua Fulton
Australia's alternative investment property market is expanding, driven by demand for niche sectors such as licensed hotels, child care centres and petrol stations.
With typically long WALE and strong tenant covenants, these assets offer stable returns and diversification. Institutional and private investors are active in the $5-50m market, although prolonged high interest rates and costs are slowing some transactions.
While funding for private credit and equity remains available, regulatory and financial pressures are influencing asset values and market activity. Regardless, these sectors remain appealing for their long-term growth and resilient yields.
A Challenging Start to 2024
In 2024, the Australian pub market began in much the same way as it did the previous year, with investor activity subdued by the lingering effects of interest rate hikes implemented by the Reserve Bank of Australia. The market was caught in a period of uncertainty, as investors faced the possibility of either a significant downturn or a recovery driven by improved economic conditions. The challenging environment forced operators to adopt a cautious approach, which often involved putting plans for refurbishments and new ventures on hold.
Rising Operational Costs
Despite the slow initial pace, high interest rates remained a key challenge. Although rates stabilised throughout the year, rising operational costs – including increased wages, utilities, and insurance – further squeezed margins for pub operators. This combination of high costs and tighter financial conditions pushed investors to focus on businesses with strong, consistent cash flow and established profitability. This investor preference for stability over speculation became a defining feature of the year.
Institutional and Regional Market Trends
Institutional investors demonstrated continued confidence in the pub sector. A notable example was Charter Hall’s acquisition bid for Hotel Property Investments, which underscored the sector's attractiveness as a long-term investment. Similarly, major players such as Australian Venue Co. remained active in expanding their portfolios, acquiring high-quality assets in key locations.
While urban pubs retained their appeal for both domestic and international investors, regional and coastal venues at a generally lower price point saw an unexpected surge in interest. This was driven by demographic shifts and the ongoing recovery in domestic and international tourism. Pubs in areas with strong tourist demand became highly sought after by private investors and owner-operators, many of whom sought a balance of financial return and lifestyle benefits.
Positive Market Outlook for 2025
As 2024 drew to a close, the market remained resilient, with a broad range of buyers actively seeking opportunities. With the outlook for 2025 looking positive – particularly if interest rates decrease – there is strong potential for a more dynamic market. Investors are likely to see increased transaction volumes and fresh opportunities emerge as the sector continues to evolve.
High Demand and Market Overview
According to the March quarter report from the Department of Education, there were 1.43 million children in care, over 1 million families using care, more than 14,500 approved services, and $3.36 billion in total child care subsidies in Australia.
Given the high levels of demand, anticipated growth in the 0-5 age group over the next 10 years, female labour force participation rates, and the fact that child care is a crucial part of Australia’s economy, the sector has become a focal point in Australian politics.
Government Policies and Initiatives
On 18 September 2024, the Productivity Commission released its report into childhood education and care. It included many recommendations designed to ‘support affordable, accessible, equitable and high-quality early childhood education and care (ECEC) that reduces barriers to workforce participation and supports children’s learning and development’.
One of the Productivity Commission’s recommendations involved abolishing the activity test subsidy scheme. In December 2024, the Albanese Government pledged a $1b fund to subsidise a minimum of three days care for every family earning less than $530,000 a year, and build or expand more than 160 child care centres if re-elected.
Strong Investment Demand and Key Transactions
Currently the child care sector is experiencing increased daily fees and strong rental growth, and is considered a sustainable asset class. Additionally, the forecast demand combined with bi-partisan political focus on the sector is boosting confidence across high net worth private investors, institutional investors and foreign investors. Local investors are looking across the country as this asset category is increasingly being viewed as a national product due to the operator profiles.
Most child care assets are transacting for sub-$10m, however blue chip properties continue to attract increased demand resulting in higher prices. For example, a two-level purpose-built child care centre in the Melbourne suburb of Brighton East sold for $16.5m in November 2024. Constructed in 2017, investors were particularly drawn to the long-term redevelopment potential of the site as it forms part of the Hampton East Structure Plan, achieving a yield of 4.93%. The centre is occupied by Only About Children under a 20-year lease (commencing 2017) with two further terms each of 10 years. The rent is subject to annual 3.25% increases until 2028, then subject to annual 3% increases. Of particular appeal, the lessee is responsible for payment of all outgoings including 50% land tax, management fees, and repairs and maintenance. The terms also included a six month bank guarantee.
Conversely, the recent sale of a centre in Avondale Heights for $8m in November 2024 on a yield of 5.79% demonstrates the current softer market conditions since the peak in 2021. Constructed in 2022, the property is occupied by Nido Early School under a 20-year lease (commencing September 2022) with two further terms each of 10 years. The property had previously sold in July 2023 for $7.895m reflecting a yield of 5.43% and had earlier sold ‘off the plan’ as part of a larger portfolio in October 2021 for $8.568m on a yield of 4.93%.
Ongoing Challenges for Operators
While the sector is enjoying many positive factors, it still faces some challenges. These include high construction costs limiting the development pipeline, softening yields, and increased land tax liability in some jurisdictions that is impacting net income for investors (where land tax is non-recoverable).
Child care operators have also not been immune to the shifting market dynamics, with higher rental costs, increased competition impacting occupancy rates, higher operational costs and higher wage expenses. The ongoing cost of living crisis is also impacting their ability to retain staff, with many forced to pay in excess of the award rate.
Investor Sentiment and Market Dynamics
The petrol station market is also seeing improved investor sentiment, particularly for tier one assets in metropolitan locations. Demand is also returning for prime grade assets in large regional centres, although it remains more subdued for lower-tiered assets, in particular those with lesser-regarded tenant covenants in smaller regional townships or those offering a higher environmental risk profile (i.e. older style fuel infrastructure system).
Yield Softening and Recent Sales
Notwithstanding, there has been a softening in yields over the past couple of years. This has been reflected in two recent sales, one of which was a BP service centre development in the Melbourne suburb of Cranbourne West that sold in April 2020 for $20.317m at an initial yield of 5.0%, and then resold in June 2024 for $16.3m at an initial yield of 5.44%, which reflected a circa 20% drop in value. Another sale worth highlighting was that of a Shell truck stop in the Melbourne suburb of Yarraville, which sold for $10.9m in June 2021 at an initial yield of 5.72% and then resold for $9.0m in November 2024 at an initial yield of 8.03%, reflecting a circa 17% drop in value.
Shifts in Consumer Behaviour
The market has generally seen a reduction in fuel sales since the onset of the COVID-19 pandemic. Australia consumed 207.3 thousand barrels of petroleum a day in 2023 compared to 303.8 thousand barrels a day in 2019. This drop in consumption is due to a number of factors including the sudden uptake in the work from home model, cost of living pressures and the rise in EV sales.
Convenience Retail and EV Infrastructure
The major fuel operators have looked to increase their retail appeal to counterbalance the drop in fuel sales. Australian convenience store sales, which are led by 7-Eleven, Shell Reddy Express, Ampol and BP, reported strong sales through 2023, with food and beverage purchases increasing by 12.6%. The major brands are looking to capitalise on the shift in consumer perception around the types of services and products a convenience store can offer by including a wider range of fresh hot and cold food options, as well as co-branding opportunities with popular fast food retail brands (i.e. Daniel’s Donut’s, Pie Face, Boost Juice and Uber Eats). We have also seen Ampol launch its Foodary brand and Viva Energy (Shell) acquire the OTR business. It has proven to be a highly successful business within South Australia, with around 70% of revenue generated through convenience sales compared to the Coles Express brand at around 30% (recently acquired by Viva Energy and rebranded Reddy Express).
The provision of EV charge stations within service station assets has largely stalled because of the difficulty in obtaining the required power supply. If the supply is available, there are also significant costs associated with providing the required infrastructure (estimated to be in excess of $0.5m). Sites benefiting from EV charge stations generally had them installed by the EV provider with a peppercorn rent or a profit-share agreement in place with the service station operator. There isn’t yet enough evidence to prove that the financial benefit of EV charge stations outweighs the significant setup costs, in particular in suburban sites.
Alternative investments in Australia's commercial real estate market, including licensed hotels, child care centres, and petrol stations, remain attractive for their stability and long-term growth potential despite economic pressures and evolving market dynamics.
Opteon has a dedicated team of specialists that understand the operating dynamics, economic challenges, regulatory and compliance responsibilities, and market drivers across the industry.
Our team of advisors assist operators, investors, major lenders, individuals and national corporations throughout Australia across all major asset classes including hotels, motels and resorts, child and aged care facilities, caravan parks, pubs and taverns, gaming venues, and service stations.
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This article is produced by Opteon Property Group Pty Ltd. It is intended to provide general information in summary form on valuation related topics, current at the time of first publication. The contents do not constitute advice and should not be relied upon as such. Formal advice should be sought in particular matters. Opteon’s valuers are qualified, experienced and certified to provide market value valuations of your property. Opteon does not provide accounting, specialist tax or financial advice.
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Sources: ABS, Department of Education, ABC, JLL, The Australian, and The Hotel Conversation