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Childcare Centres: Operating, Building, Developing and Investing

Childcare Centres: Operating, Building, Developing and Investing

November 17, 2025

Taya Foxman

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Published

17 November 2025

Category

Commercial, Property, Property Law

Recent Regulatory developments

The childcare industry is a dynamic sector undergoing constant change and review. Three key developments over the past 12 months have been:

  • The Fair Work Commission approving the multi-employer bargaining process for members of the relevant unions and service providers who are members of the Australian Child Care Alliance (ACA) to enter into an enterprise agreement.
  • The Early Years Strategy announced by the federal government which sets out the government’s vision for the future of Australian children and their families.
  • The ACCC recent review and report on the sector and recommendations to the government.

 

The governments National vision aims to deliver better outcomes for children and includes:

  • Investing in accessible and affordable ECEC for the first five years of a child’s life leading to better outcomes for children in education, work, health and relationships, particularly for children experiencing vulnerability or disadvantage. society and economy; and
  • Support for parents and carers, particularly women, to fulfil their career aspirations through work or study to boost family budgets, grow women’s retirement savings and increase the talent and capacity of Australia’s workforce.

 

The ACCC review made 8 recommendations to the federal government to improve affordability and access to childcare and recommended the government take a market stewardship role and reconsider its price regulation mechanism due to unintended consequences in the sector between lower disadvantaged areas.

The ACCC found that the federal government’s childcare affordability reforms introduced last year (Cheaper Child Care) reduced the cost for families between 8.8 and 13.8% but the cost of childcare had increased by over 22% over the past 5 years for families and those savings have been absorbed by increase fees yet again.

The key finding was that the government’s policies need to be varied from a one-size-fits-all approach. The federal government has not yet committed to the ACCC recommendations.

Some observers are concerned the sector is close to oversupply however that is not borne out by the statistics on population growth, and the Governments push to continue to support working parents.

Whether it is applications for new licenses, development of new centres, or sale and purchase of existing Centres the ELC and Childcare sector is dynamic and active but also increasingly competitive with the larger corporate groups taking up greater market share!

Issues that will impact the sector

The Federal government’s funding to support the sector over 4 years from 2024/25 will be around $84 mill (with $18.4 mill p.a. ongoing) and a further $98.4 mill to support children with special needs.

  • Lower income families will gain a larger share of the subsidy under proposed changes.
  • These government subsidies help to underpin rental paid by ELC operators and therefore Investment in the industry by developers and freehold owners will remain strong.
  • Rentals based on place per child have shown significant increase from $2,000. outer metro to up to $4,000 per child inner metro higher end Centres, the average now around $3,000 – $3,200 per child.
  • Continued acquisition by the larger corporate groups acquiring smaller well-run centres.
  • Greater pay and incentive for women to re-join the sector to meet higher staff child ratios and changing flexible work patterns of families.

Developers and Investors

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.

Investors

The income/return to freehold owners in the sector remains steady from 5% to 8% with good capital growth. This will likely improve if interest rates reduce. These are excellent returns compared to current commercial/retail property yields in the order of 2.5% to 4%.

One issue for freehold investors is that bank funding has become tighter however there are now second tier lenders who are open to lend and private investors. The Banks currently lending on freehold ELC’s are the CBA, and St George with others tightening their finance criteria.

For the freehold investor ELC’s remain a very good investment in commercial property due to:

a. Excellent income return with long term leases (10 to 15 years with options)
b. The need for centres to meet the NQF standards
c. Operators are underpinned by government subsidies.

d.The growth in population, regional areas and growth corridors in many cities create demand.

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 rising cost of construction and replacement costs.

CBRE also are of the view that for investors there will be further yield compression as supply decreases and new childcare centres decline. It becomes a matter of limited supply and demand so it is unlikely investors will get yields of 6% in metropolitan areas in cities across Australia.

Investors should also consider that despite the lower yields there are depreciation benefits in acquiring a new centre. Comparing returns elsewhere with the depreciation allowances it can increase the return on investor capital of up to 15-30% 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 80 and 120 places.

As with any investment there are risks and the devil is in the detail so ensuring you do proper due diligence and have experienced financial legal and property advisors on board to reduce risk.

 

Leasing a Childcare centre: Lease term issues

If the lease is 15 years or more and the landlord requires the tenant to contribute to any of the improvements the Lease may fall outside of the Retail Leases Act 2003 (Vic), and the protections under that Act for the operator/ tenant do not apply.

This varies from State to State so you need to get advice on the Lease whether as a tenant or an investor.

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.

 

Operator/Tenant if it is not a Retail Lease

  1. There are less protections to a tenant if the Retail Leases Act does not apply as it becomes a commercial lease subject solely to the contractual terms agreed.
  2. There may be no right to seek mediation via the Small Business Commissioner if a dispute arises.
  3. The rent increases at market may not be genuine market reviews so the terms of the Lease (if NOTa RLA lease) need to be carefully reviewed.

 

A good rule of thumb for any tenant is that the occupancy costs should fall ideally within 12% to 22% of the business gross revenue to ensure the business is viable for the operator.

Pre- lease Agreements for building and developing a Childcare centre

Building and development a childcare centre carries considerable risk and cost…. It is not for the beginner! Knowing what the landlord or their builder will deliver to you as a tenant is critical.

 

The devil will be in the detail (detailed plans and specifications) and in the agreement.

Often, we see an AFL which has sketch plans attached which is a risk to the tenant as to what will eventually be delivered so we suggest that the AFL provide for detailed specifications as to what a landlord will deliver to the tenant at handover, as far as infrastructure, services and landscaping.

It is the tenant not the landlord that must meet the NQF standards to be approved for operation of the centre, so we suggest the tenant engages 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 following are the key issues that need to be addressed and considered:

  • Will 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 casethe Retail Leases Act does not apply?
  • Will personal guarantees of tenant’s directors be required? What security deposit or bankguarantee will be required?
  • What are the tenant’s repair, maintenance and make good obligations?
  • Who is responsible for planning approval and if so how many child places as this will determine the rent.
  • Who is liable for the landscaping and what is included in that definition.

Buying and selling a childcare centre

Contracts of sale need to be carefully drawn, and the following are some key matters to consider:

  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. Check planning approval for other new 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?

Sanicki Lawyers Services

We have over 25 years’ experience and expertise in the ELC sector acting for Investors, Operators and Developers.

We can advise on the sale and purchase of ELC’s and on Pre Lease, Agreement to lease and Lease Agreements as well as company structures, employment Law, partnership, shareholder or JV agreements.

We know the sector and have access to a network of consultants to assist our clients as they may need.

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

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