Leasehold vs Freehold Childcare: What’s the Difference in Value?
A childcare centre listed at $1.5 million and another listed at $8 million can generate the exact same revenue. The difference? One is a leasehold business. The other is a freehold property. If you don’t understand what you’re actually buying — and how each is valued — you’ll either overpay or miss the opportunity entirely.
Two Assets, Two Valuation Methods
The most common mistake in childcare transactions is treating leasehold and freehold as variations of the same thing. They’re not. They are fundamentally different assets, valued using completely different methods, appealing to completely different buyers.
Leasehold means you’re buying the business only — the operation, the staff, the enrolments, the goodwill, and the right to operate from the premises under a lease. You do not own the building or the land. Your landlord does.
Freehold (sometimes called “freehold going concern” when sold with an operating business, or “freehold investment” when sold with a tenant in place) means you own the land, the building, and either the business or the rental income it produces.
The valuation method follows the asset type. Leasehold businesses are valued on EBITDA multiples. Freehold investments are valued on capitalisation rates. Mixing the two up leads to confusion, bad offers, and failed deals.
ChildcareLink Insight: We regularly see buyers apply freehold thinking to leasehold transactions — comparing a $1.2M leasehold business to a $6M freehold property and concluding the leasehold is “cheap.” It’s not cheap or expensive — it’s a different asset class entirely. Compare leasehold to leasehold, freehold to freehold.
How Leasehold Childcare Businesses Are Valued
A leasehold childcare centre is an operating business. The buyer is purchasing the right to run the centre, employ the staff, collect the fees, and operate under the existing lease. No property ownership changes hands.
The standard valuation method is a multiple of adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation). In the current Australian market, leasehold childcare businesses typically trade at 3x to 5x adjusted EBITDA, depending on quality. Single-site centres with solid occupancy and clean financials commonly transact around 4x. High-performing multi-site groups or centres with exceptional lease terms, NQF ratings, and occupancy above 90% can push beyond 5x.
The critical word here is “adjusted.” The EBITDA on the profit and loss statement is almost never the number a buyer will use. Owner salaries, above-market rent (or below-market rent), one-off capital expenses, personal expenses run through the business, and unnormalised Child Care Subsidy (CCS) income all need adjusting. In our experience, the gap between stated EBITDA and adjusted EBITDA can be 20–40%.
What Drives a Higher Leasehold Multiple?
Five factors push a leasehold multiple higher:
Lease length. A centre with 20+ years remaining on the lease (including options) is far more valuable than one with five years left. Lease tenure is arguably the single biggest driver of leasehold value — as the remaining term shrinks, so does the multiple.
Occupancy. Centres running above 85% occupancy demonstrate proven demand. Below 70%, buyers discount heavily or walk away.
NQF rating. A rating of Meeting or Exceeding the National Quality Standard signals operational quality and reduces regulatory risk.
Location demographics. Strong population growth, young family density, and limited competing supply in the catchment area support future earnings.
Fee headroom. If current fees are below the CCS hourly rate cap, there is room to increase revenue without reducing subsidies for families.
How Freehold Childcare Properties Are Valued
A freehold childcare property is a piece of commercial real estate. The buyer is purchasing the land, the building, and the rental income from the childcare operator (who becomes the tenant). It is a passive investment — the buyer does not run the childcare business.
The standard valuation method is capitalisation rate — the annual net rental income divided by the purchase price, expressed as a percentage. A lower cap rate means a higher price relative to income. In the current market, according to Stonebridge Property Group and Burgess Rawson from CBRE, freehold childcare properties in metropolitan areas are trading at yields of 4.25% to 5.25%, while regional properties sit between 5.25% and 6.25%. Premium assets in high-demand Sydney locations have traded even tighter — a G8 Education-operated centre in Vaucluse sold at 3.31%, and Saltwater Preschool in Newport sold for $16 million at 4.37%.
These yields have compressed significantly. Stonebridge reports yield compression of 90 to 130 basis points across the sector in 2025, driven by institutional and private investor demand. Burgess Rawson from CBRE transacted $241.6 million in childcare property in FY2024–25, including a record $151 million portfolio auction in December 2025.
What Drives a Lower Cap Rate (Higher Freehold Price)?
Four factors compress freehold yields:
Long lease term. A brand-new 15 to 20-year net lease with options to 30+ years is the gold standard. Shorter remaining terms push yields higher (and prices lower).
Tenant quality. A nationally branded operator (such as G8 Education, Goodstart, or Guardian) commands tighter yields than an independent single-site operator. Institutional tenants reduce perceived risk.
Net lease structure. If the tenant pays all outgoings — including insurance, council rates, maintenance, and land tax — the investor’s income is “clean.” Triple net leases achieve tighter yields than gross leases.
Location and building quality. Purpose-built centres in high-growth corridors with strong demographics attract more competitive bidding than older conversions in established areas.
ChildcareLink Insight: The lease is the engine of freehold value. A freehold childcare property with three years left on the lease is not a “childcare investment” — it’s a development site with an expiring income stream. Buyers pay premium prices for long, secure, net leases. If you’re a landlord, your lease structure directly determines what your property is worth. If you’re a buyer, always check the lease first.
Side-by-Side Comparison
Here’s how the two stack up across the factors that matter most:
Purchase price. Leasehold businesses typically range from $500,000 to $3 million, depending on EBITDA and location. Freehold properties typically range from $3 million to $16 million or more. The capital required is vastly different.
Returns. A leasehold buyer running the business might target a return on investment of 20–35%, because they are actively managing staff, enrolments, compliance, and operations. A freehold investor collecting rent might accept 4–6% because the income is passive, long-term, and government-backed through CCS.
Risk profile. Leasehold carries operating risk — staffing, occupancy, regulatory compliance, and the landlord relationship. Freehold carries property risk — tenant default, vacancy, building maintenance, and interest rate exposure. Neither is “safer” in absolute terms, but freehold is generally considered lower-risk because the income stream is contractual and the underlying land retains value.
Exit strategy. Selling a leasehold business requires demonstrating strong, transferable earnings. Selling a freehold property requires demonstrating a secure, long-term lease to a quality tenant. Each attracts a different buyer pool.
Financing. Banks treat these differently. Freehold purchases are secured against the property itself — loan-to-value ratios of 60–70% are common with specialist childcare lenders. Leasehold purchases have no property security, so lenders assess business cash flow, lease tenure, and sometimes require additional personal guarantees.
Freehold Going Concern: The Hybrid
There is a third option that sits between the two: freehold going concern. This is when the owner operates the childcare business AND owns the property — and sells both together.
Valuing a freehold going concern is more complex because it combines two separate income streams. The business component (operating profit) and the property component (imputed rent to a hypothetical tenant) need to be assessed independently and then combined. Many valuers will separate the two — applying an EBITDA multiple to the business and a cap rate to the property — and add them together.
The key risk with a freehold going concern is that if the business underperforms, the property value is also affected — there is no independent tenant to fall back on. Conversely, if the business is strong, the combined value can exceed the sum of the parts because a buyer gets both the income and the asset in one transaction.
ChildcareLink Insight: Freehold going concerns are often the most mispriced assets in the childcare market. Sellers who own both the business and the property sometimes set an asking price based on what they “feel” the total is worth, without properly separating the two components. Buyers should always value the business and the property independently, then combine. If the combined number doesn’t match the asking price, you know exactly where the gap is.
Which One Should You Buy?
The right choice depends entirely on what you want from the investment.
Buy leasehold if you want to be an active operator, you have childcare management experience (or a strong team), you want higher potential returns, and you’re comfortable managing people, compliance, and operations day-to-day.
Buy freehold if you want passive income, you’re an investor seeking a long-term, government-backed rental stream, you want an asset that appreciates with land value, and you have the capital for a larger purchase.
Buy freehold going concern if you want to own both the business and the property, you want maximum control, and you have the experience and capital to manage both asset classes simultaneously.
The Bottom Line
Leasehold and freehold childcare are different investments that happen to share the same building. One is a business. The other is a property. They are valued differently, financed differently, managed differently, and attract different buyers. Understanding which one you’re looking at — and which valuation method applies — is the first step to making a sound decision.
Considering a childcare acquisition or sale? Whether it’s leasehold, freehold, or freehold going concern, ChildcareLink can help you understand the true value. Visit childcarelink.com.au or contact our team for a confidential discussion.
Sources
- Stonebridge Property Group (2025) — transaction data and yield data
- Burgess Rawson (CBRE) — FY2024–25 auction data and yield data
- Cushman & Wakefield — childcare investment market analysis
- IBISWorld — market size data
- Green Finance Group — valuation methodology
- ChildcareLink — transaction experience
Disclaimer: The information provided in this article is for general informational purposes only and does not constitute financial, legal, or professional advice. ChildcareLink recommends seeking independent professional advice tailored to your specific circumstances before making any business or investment decisions.
