Property Australia: Funding is a growing challenge, but the retirement living sector is back on track for growth.
Key Points:
With more than a quarter of Australians forecast to be in the over-65 age bracket within 50 years, the retirement living and aged care sectors in Australia are expected to undergo significant change over the next two decades. But a diminishing pool of taxpayers and a burgeoning number of people requiring higher levels of healthcare means funding is a growing challenge.
It is a challenge that property groups and funds managers are taking on, particularly in the retirement living segment where the growth potential is anticipated to reap healthy investment returns. The market has been attracting increasing amounts of institutional investment over the past five years, with major players such as Stockland, Lend Lease and AMP Capital Investors all becoming active participants.
But the global financial crisis caused a considerable shake-up in the sector. Like all areas of the property industry, development in retirement living came to an abrupt halt during the GFC - funding dried up and superannuation Fund losses as well as a stagnant residential sector meant retirees were forced to rethink their plans. Smaller retirement living operators with high debt levels found the going tough.
Takeovers and mergers proliferated. Stockland has emerged a clear winner post-GFC, with its takeover of the Aevum group in late 2010 making it the largest for-profit player in the NSW and Victorian retirement living sectors and doubling its number of assets.
Stockland has a clear strategy for retirement living, which it outlined to investors in a recent presentation. The company sees synergies between retirement accommodation and its expertise in commercial property and residential com munities. Stockland told investors retirement living has a strong underlying demand, good yield for mature portfolios (around 9 percent), relatively low risk and "recurring income with development exposure".
Its strategic plan is to use its considerable land bank to build new retirement assets, supplemented by selective acquisitions - hence the Aevum takeover and, according to analysts, a likely future acquisition move on FKP, in which Stockland has a 14.9 percent stake and first option on asset sales.
The Aevum takeover has brought with it some aged care assets - something that goes against the company's strategy to focus purely on retirement living.
A spokesperson for Stockland told Property Australia the company was reviewing the retention of these assets, with possible options being to sell them or to enter into a joint venture with a n operator to manage them. "Obviously we will maintain the high quality of care in these aged care assets until a decision is made," the spokesperson said.
Director of Jones Lang LaSalle's health & aged care division Brendan Wenke says the retirement living sector suffered a significant slump in sales throughout 2008 and into 2009, but there was an obvious upturn in 2010.
"The Government's First Home Owners' Scheme boosted the residential market, which in turn helped retirees who were looking to sell their homes. This saw sales in retirement villages improve but, that being said, new development in the sector has still been stifled with new land and funding hard to come by," says Wenke.
The number of smaller operators going into receivership increased, typically those owning one or two villages.
"We handled quite a bit of this receivership business last year. This year though has been very positive. Already a lot of the bigger players, such as Stockland and Lend Lease, are on the lookout for assets. On the whole this gives the market more confidence."
Not-for-profit sector
The not-for-profit sector has also been very active during the past couple of years and is benefiting from the current consolidation.
"Many of the experienced nor-for-profit operators are cashed up and ready to go. They are less bank-reliant than the profit sector and they've been around for years. In the past when groups have been buying at aggressive prices they have not been as able to compete in acquiring new assets, but the current pricing has allowed them to get back in. They have the ability to buy," says Wenke.
Stock shortage over the next few years will provide operators with solid business growth, says Wenke, which will further encourage investment.
Aged car rethink
Aged care, on the other hand, is undergoing a rethink with the Productivity Commission currently reviewing funding arrangements for the sector.
The draft report of the Productivity Commission's review recommends a greater emphasis on a user-pays model, with individuals taking more responsibility for saving for their aged care needs through superannuation, savings and insurance.
The family home is also expected to play a greater role in funding, either through sale of the home or through equity release arrangements similar to a reverse mortgage.
Many in the industry want to see greater integration of the retirement living and aged care sectors with more facilities offering retirement village accommodation and aged care transition arrangements in the one location.
Overall response to the commission's draft report from both sectors has been positive, say analysts.
Wenke says the industry has welcomed the recommendations for alternative funding arrangements and he expects to see a lot more investment in both retirement living and aged care from institutional investors, including superannuation funds, in the next few years.
"We will see a lot of different funding models emerging and a more holistic approach to the whole sector. We will also see a bigger push to medium density development as the demand for accommodation continues to rise," says Wenke.
Deloitte put in a submission to the Productivity Commission's review on behalf of its clients, including the Aged Care Association Australia. Helen Hamilton James, Deloitte's national leader senior living, says the overall response to the draft report's recommendations from both sides of the market has been very positive.
"Both sectors- the not-for-profit nursing home operators and the listed property developers with assets in retirement living - want to see more integration and an opening up of the market. The report is encouraging that. At the moment operators are encumbered by different regulations in different states," says Hamilton-James.
"If the recommendations in the report are adopted, many restrictions to do with community care packages, number of beds allowed, extra services and the distinction between low and high care, would be removed."
Deloitte would like to see more emphasis on long-term funding, particularly formal initiatives for more funding through superannuation, private and public health insurance and investment from the capital markets.
Targeting super
One company targeting superannuation funds for investment in retirement living is asset management and investment company, Aviiid Third Age Living. Due to launch an unlisted retirement living investment fund in late March 2011, the company sees super funds as a logical investment source for retirement and aged care assets.
Aviiid's managing director Scott Marinchek says, historically, super funds have not been very active in the sector but this is likely to change.
"Increasingly super funds are wanting to invest in areas that benefit their investors. Super fund members also want to invest in areas that will provide for them in their retirement. Obviously the investment return also has to be there," says Marinchek.
With the growth forecasts for both retirement villages and aged care facilities, Marinchek believes investment returns will continue to be healthy. The Aviiid fund, expected to raise between $450 and $700 million, is targeting low double-digit returns.
But Marinchek does think some operators need to be more realistic about their asset valuations, with many hanging onto pre-GFC valuations and property growth forecasts. This is holding up investment in the sector, he says.
"We see some vendors who'd be happy to sell if they got the same prices offered a few years ago. But as long-term asset holders it is our responsibility to look at the long-term cash yield of an asset - we need to look at what sort of capital is needed to upgrade and maintain the asset and offer the services needed. Also what is left afterwards to give back to investors."
Australian Unity, already an investor in the retirement village segment, also recently launched an unlisted fund for institutional investors, the Australian Unity Retirement Village Property Fund (RVFP).
In launching the fund, head of Australian Unity Investments David Bryant said the fund will buy well-established retirement villages and will seek to achieve returns of 4 percent over the benchmark of rolling 10-year Australian government bond yields, after fees. Fifty percent of the return would come from income from retirement villages and 50 percent from long-term capital appreciation of the properties. Minimum investment in the fund is $5 million.
"Studies show a growing interest in older Australians in retirement villages, particularly those that offer a range of services and facilities such as workshops, gyms, adult education and social activities," Bryant says.
"Coupled with the rapidly ageing population, this means demand for retirement communities will grow significantly over the medium to long term, which will support the value of our portfolio."
Please visit Property Australia website for the full article.
Please visit NEWS & EVENTS to view a listing of all articles.