Property Australia: Not So Far Horizons.
There are some interesting developments occurring in third-age living, otherwise known as the accommodation and care segment for over-55s. Transaction flow may be slow overall, but as Scott Marinchek notes, the fundamentals are quite strong. Investors, he says, understand that demand is there and will continue to be.
"So what's the right sort of supply capacity to actually offer the properties that today's retirees and tomorrow's retirees are going to want? That's one of the big questions that we try to answer."
Scott Marinchek is managing director of Aviiid, which comprises an investment management business, trustee and charitable foundation. The company was founded in 2009, after Marinchek spoke to a number of institutional investment groups about their investment wish-lists.
Despite many businesses being unable to sustain themselves during the GFC, there remained underlying demand for senior housing and implicit demand for investment products in that sector.
Demand certainly remains, and there are interested parties — not just investors — sniffing out opportunities. Offshore investors are looking, particularly from Asian economies not highly challenged by the strength of the Australian dollar. Superannuation funds are showing interest in establishing debt, and Aviiid has had discussions with an offshore group setting up a mezzanine development fund.
Other players are potentially stepping in where major lenders stood before the GFC.
Furthermore, Marinchek believes Australia is going to see all kinds of investors — whether investing through debt, or mezzanine funding or equity — coming into the marketplace with specific objectives. There have not been any securitisation transactions of senior housing or care, he notes. Private equity groups tend to have return requirements well above other types of investors, he adds, so they might be looking for 20+ percent returns, and they might also have an investment horizon of three to four years.
"We think right now we're seeing a substantial amount of interest from certain types of offshore investors. So they've acknowledged that Australia has a bit of a challenge with its debt funding; they've acknowledged that Australian institutional investors might already be overweight in property," Marinchek says.
But certain jurisdictions still like the Australian market he says — "the sovereign situation", location of assets, consumer demand and strength of the market. And they are interested in contributing capital in relation to certain objectives, such as exposure to long-term asset appreciation or ongoing income.
Meanwhile, Aviiid has found through its discussions that superannuation funds have been overweight in property — unless interest rates go up and their obligations go down, or they get a substantial increase in contributions, "they don't have any more of their pie to allocate to property", which may open the door to debt opportunities.
"For those investors that are already overweight in property, there's very little we can tell them, because of the transaction costs of getting out of property, to convince them to reallocate out of their existing positions and allocate into senior housing and care," Marinchek says.
"They are, nonetheless, actively managing their portfolios. But property is a long-term asset allocation play and the transaction costs ... of acquiring property and selling property are a lot higher than the transaction costs of acquiring shares or bonds or other things. And they're obviously much higher than the cost of establishing debt, which is another way of investing in the space."
And, it seems, debt may well be a genuine proposition. Amid the current tight lending environment, Marinchek says superannuation funds have been courting Aviiid, on the lookout for opportunities — not to invest, but to lend.
"We have been contacted by a number of superannuation funds who've said we are seeing opportunities right now to lend in the commercial property sector; what opportunities can you provide us to lend the senior housing and care sectors? And we're in the midst of several of those conversations."
Competing with the banks? Not necessarily, Marinchek says, but they are positioning themselves in the market to offer things banks won't — for example, debt going out for seven years. Most banks will not go beyond three, and certainly not five, in senior housing and care, he notes.
He says debt is now under consideration because of interest rates and other opportunities. It is already being done in commercial property, Marinchek says, but to the best of his knowledge it is yet to occur in senior housing and care.
Such financing prospects are significant, particularly with larger banks changing how they look at capital allocation and different borrowers for the same types of assets. An individual single retirement village property developer and the cost of borrowing would, under the new capital accord, be different from a group that has several villages or is a listed company, Marinchek argues, simply because the borrower is different and the bank is required to hold more capital against loans made.
"And so that creates some interesting challenges and opportunities. How do developers get funding in a cost-effective way? And how can investors potentially participate in very attractive borrowing returns?"
Potential lenders are surveying these gaps, and will charge appropriately, Marinchek says. Debt from such sources would be more expensive than three-year debt, but it would offer more security for investors and potentially different borrowing terms, which developers and operators are looking for and would pay for.
"For example, we spoke to an offshore group that's setting up a development lending fund, a mezzanine development fund," Marinchek says.
Access to debt is likely to impact supply, he notes. "Debt is, however, only one component of funding and the availability of required new supply is also impacted by demand, suitable land, planning permission, property prices and after-tax commercial returns."
Marinchek believes that even with more readily available debt, the supply of well-located and appropriately configured senior housing is unlikely to meet the mid-term forecast demand of the growing and ageing population.
"Failure to increase available financing for new and redevelopment projects is likely to result in greater required equity contributions from investors and, in the absence of appropriate leverage, decreased equity returns. which may adversely impact supply and affordability of accommodation."
He also signals a rise in the significance of partnerships between the not-for-profit and traditional commercial sectors, to deliver objectives, not all of them financial.
This includes banks asking who they can partner with in respect to clubbing or syndicating loans so that they have a breadth of perspective and ability to manage risk in a pooled situation.
Other challenges remain for the sector even though, according to Marinchek, well-located properties continue to be highly sought after and operators with access to such areas "are for the most part doing well". Prior to the GFC, there were quite a few development opportunities and greenfields projects in the pipeline, many of them regional, in catchment areas not yet proven, he adds.
"In fact there used to be an adage, which you've certainly heard in a film, 'If you build it, they will come'. And what we've seen in senior housing and care is that `If you build it, they will come' has not always materialised in successful businesses," Marinchek says.
"In fact, many regional areas that didn't have the essentials ... for being ideal places to get older haven't been successful in terms of developing properties, and those properties have not held their value, and have not necessarily been generating sufficient cash to service debt, to provide operating services and to reinvest in those communities ..."
In terms of investment, Marinchek flags a "much more specific" post-GFC capital markets environment, where investors are identifying the kinds of risks they like and are willing to accept for a certain return. And investors are better educated, potentially having lacked access to data and information pre-GFC.
"I think in many asset classes, not just property, but infrastructure and others, there was a significant, amount of investor demand that was being met for generating earnings and getting returns, and investors perhaps weren't scrutinising assets in the way that they are now. Certainly banks weren't either."
Marinchek says investors have very clearly articulated to them that they like development exposure, and "they like that traditional opportunity that's available in property, to capture value by creating new properties with new offerings".
"Whereas other residents have clearly articulated to us that they like to invest in established assets that are generating recurring fees and recurring income. And the current retirement villages product offers the opportunity to capture income, but that income is very lumpy.
"A substantial portion of it happens when new residents move in after old residents move out. And many investors don't like that. However, certain groups of investors have said they're comfortable with that as a proxy, for example, for residential property returns and other things."
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