Childcare Centres: Operating, Building, Developing and Investing in 2026

The childcare industry is a dynamic sector undergoing constant change and review with the most recent development being the Federal government 3-day guarantee, giving eligible families at least 72 hours (3 days) of subsidized care per fortnight from 5 January 2026, replacing the activity test, with up to 100 hours for First Nations or high-participation families.

The industry comprises approximately 13,370 businesses with the top 4 ELC operators generating less than 40% of the industry revenue which leaves 60% of the revenue being generated by smaller operators.

The return on freehold owners in the sector remains steady, around 5% to 8% with good capital growth which is a positive return compared to standard retail and commercial returns of around 2% to 4%. One issue for freehold investors is that bank funding has become tighter, however there are now second-tier lenders such as Judo Bank who are open to lending as well as private lenders.

a. Positive returns with long-term leases (10 to 15 years with options)
b. The need for centers to meet the NQF standards
c. ELC operators are underpinned by government subsidies.
d. The growth in population, regional areas and growth corridors in many cities create demand.

There is also the Worker Retention Payment scheme for educators (10% wage rise in year 1, 5% in year 2), and new funding for disadvantaged areas via the Community Child Care Fund, and quality reforms under the National Quality Framework (NQF).

A recent report issued by CBRE commented that even in the face of higher interest rates and living costs the sector for investors remains steady and attractive driven by scarcity of new centres being built and the rising construction and replacement costs.

CBRE also are of the view that for investors due to limited supply and greater demand that returns will hover around 4 to 6% in metropolitan areas in cities across Australia. However, despite lower yields with depreciation allowances it can increase the return for investors’ capital up to 15-25% once depreciation is factored in.

Many investors are looking solely for a positive cash flow investment and buying a high-quality new centre on traditional borrowing rates with a yield of 5% or 6% will still likely result in positive cash flow which will increase as interest rates reduce, along with the increased capital growth benefits.

The average metropolitan yield is around 5% to 7% with the current average rent per child around $3,000 to $4,000 per child with centres operating with an average of 80 and 120 places.

The key issues to be aware of are:

In Victoria, a lease of 15 years or more is not a Retail Lease Act Lease (RLA) lease which means:

1. The Landlord can legally still have an underpinning (ratchet clause) on a market rent review. This is illegal if it is a Retail Lease.
2. Landlords can recover Land Tax (single holding rate) which is not possible if a RLA lease. Land tax rates across most States have increased substantially and this can impact significantly on the Landlords rental return.
3. The Landlord can charge the tenant legal costs to prepare and negotiate the lease.
4. There may be no right to seek mediation via the Small Business Commissioner if a dispute arises.
5. The rent increases in the market may not be genuine market reviews so the terms of the Lease (if NOT a RLA lease) need to be carefully reviewed.

What should my rent be? – A good rule of thumb for any tenant is that the occupancy costs as a percentage of the gross revenue of the business ideally should fall in the range of 12% to 22% to ensure the business is viable for the operator.

Rent Review issues – If the Lease provides for annual CPI increases be careful as with inflation CPI has increased dramatically so it is better to have annual fixed 3% or 4% increases with a market review at the commencement of each term. For many years CPI was favorable to the tenant as it was low, but it is now unpredictable with our changing economic climate.

Building and development a childcare Centre carries considerable risk and cost. It is not for beginners! Knowing what the landlord or their builder will deliver to you as a tenant is critical as the devil will be in detail (detailed plans and specifications) in the agreement.

A sketch plan will not give you enough detail so we suggest the AFL sets out detailed specifications of what the landlord will deliver at handover, as far as infrastructure, services and landscaping to ensure that the NFQ standards are met. We suggest the tenant have its own experts to advise on the plans and process and not solely rely on the landlord /developers plans.

We have been involved in numerous AFL acting for landlord / developers and tenants and know the issues that need to be addressed in an AFL to avoid dispute and disappointment.

The key issues to consider in an Agreement for Lease (AFL):

• Is there be a rent-free period and any Landlord contributions to the tenant’s fit out?
• Is the tenant a publicly listed company or subsidiary of a publicly listed company in which

  case the Retail Leases Act does not apply?

• What security deposit, bank guarantee and directors’ guarantees will be required?
• What is the tenant’s repair, maintenance and make good obligations?
• Who is responsible for planning approval
• How many child places is the minimum needed as this will determine the rent.
• Who is liable for the landscaping and what is included in that definition.

Sales contracts need to be carefully drawn, and the following are some key matters to consider:

1. 1. Check that the Planning approval aligns with the number of children approved by the Dept.
   2. Is the contract subject to finance approval?
   3. What is the settlement period bearing in mind delays in registration with the Department.
   4. Has the purchaser completed its financial and legal due diligence on the business.
   5. What is the occupancy rate over the past 3 years and has it remained stable?
   6. Is there room for growth or has it declined, if so, why?
   7. Are there planning approvals for other proposed centres in the area that may end up as competition.
   8. Has the vendor up to date financial statements and management accounts for review?
   9. Wil the key staff stay on for a smooth transition and all employee entitlements, and super been paid.
   10. Is the purchaser an investor or actual operator?
   11. Does the Centre meet the current NQS standards, if not, who will bear those costs?

We have over 25 years’ experience and expertise in the ELC sector acting for Investors, Operators and Developers and act for Vendors and purchasers of ELC’s and know what to look for and can assist our clients with a smooth transaction. We also have access to a network of consultants to assist our clients as they may need. We advise clients on Pre Lease, Agreement for Lease and Lease Agreements as well as company structures, employment Law, partnership, shareholder or JV agreements.

Contact: Robert Toth | Special Counsel | Accredited Commercial Law and Franchise Specialist | robert@sanickilawyers.com.au | mobile – 0412 67 37 57