Demographic Headwinds for Childcare Operators, but We Expect REITs to Be Largely Insulated

We maintain our fair value estimates for no-moat Arena REIT and no-moat Charter Hall Social Infrastructure REIT, or CQE, of AUD 3.00 and AUD 3.60, respectively. As 2021 draws to an end, and NSW and Victoria emerge from lockdown again, we take stock of the demographic impacts of the pandemic and assess their potential impact on demand for childcare centres, which is the main business activity of Arena and CQE. We expect demand for childcare to remain robust in Australia, and CQE’s management implicitly shares this view with its recent acquisition of more childcare centres. However, the market could be underestimating potential consequences for the sector associated with pandemic. At current prices, units in Arena screen as materially overvalued. Our preferred pick for exposure to the sector is CQE, with units screening as fairly valued.