It makes intuitive sense that superannuation funds, which are firmly in the retirement business, should look to invest in the villages and nursing homes which their growing legions of ageing members will require. They generally have not until now, but that may change as an array of institutionally-focussed products gain a track record. CATHERINE JAMES reports. Australia is getting old. The Australian Bureau of Statistics has predicted that within 30 years, more than a quarter of the estimated 31 million population will be over 65 years of age. Compared to today’s count of over 65ers (13 per cent of 21 million), the future situation poses both problems and, of course, opportunities. Such a shift in the age demographic will force change and innovation in products and services.

But one growing demand of the over-65ers that is already apparent – and is only expected to increase – is more accommodation options. Whether it’s retirement village housing or nursing homes, demand is outstripping supply in Australia and New Zealand. And with demand for more bricks and mortar comes investment prospects. A recent entrant on the investment scene is Retirement Villages Group (RVG), a wholesale, unlisted fund with a $1.5 billion portfolio of retirement village assets across Australia and New Zealand. RVG is jointly managed by Macquarie Bank’s specialist funds management arm Macquarie Capital and Australia’s largest retirement village operator, FKP.

Macquarie Capital and FKP began buying retirement living businesses in late 2005, starting with an 82 per cent stake in NZ’s largest operator Metlife Care. Four 100 per cent buyouts in NZ and Australia soon followed, and RVG was launched in November last year as the largest operator across both countries. At the time of the launch, RVG had raised about $850 million from institutional and sophisticated investors.

The latest estimate of funds under management is $1 billion, and performance is pitched at “low double digit” returns for a 10 year investment, according to RVG chief executive Patrick McClure. The portfolio holds only retirement villages, unlike some of the other “community funds” in the market with a mix of retirement village, nursing home and aged care services on their books. RVG does have some exposure to “aged care units” in NZ, but this is only around 1 per cent of the total portfolio value.

McClure says the decision not to buy into nursing homes was intentional. “We deliberately chose to have a relatively pure retirement village portfolio as there’s a strong business case for retirement villages,” he says. “Number one, of course, is the aging population.” Another element is the low retirement village penetration – approximately only 3.6 per cent of over 65ers – and hence the potential takeup, particularly in light of the demand. And there is also scope for further consolidation. The sector is highly fragmented with the top 10 providers accounting for 40 per cent of the Australian market. FKP, the largest provider in Australia, holds 8 per cent of the market. And RVG as the largest across Australia and NZ controls 8 per cent of that combined market. The sector is dominated by small family-managed businesses and not-for-profit organisations.

McClure believes this is good for his business in some ways as it gives RVG an edge in implementing economies of scale to ensure high maintenance and good management systems, whereas the smaller providers may be challenged by lack of capital expenditure. But RVG can also expect fiercer competition as more investment funds in this sector are expected to follow.

A NEW DEAL FOR RETIREES

Mariner Financial has started spruiking a soon-to-be-revealed “Third-Age Retirement Living” group of funds. It will offer investment in retirement villages, but also in nursing homes and aged care services. However, in a bid to differentiate itself from some of the diversified community funds already on the market, Mariner will seek to separate the accommodation options and aged care services into discrete portfolios as opposed to bundling them together like other alternatives in this investment sector. Spearheading the new initiative, Scott Marinchek, executive partner for Mariner Third-Age Retirement Living says “more pure” portfolios will provide better transparency for investors and allow for better pricing of return expectations.

But Marinchek is not only seeking to repackage assets. He hopes to change some things about the way the industry operates. A key feature of Mariner’s products will be to make changes to the way fees are charged to retirement village residents as the current widespread practice of “deferred management fees” is “inappropriate”, according to Marinchek. A deferred management fee is a contract between the leasing agent – the retirement village operator – and the resident. Typically the operator owns the individual units in the village and transfers occupancy rights to residents via a loan license arrangement. The annual management fees under this contract are deferred until the resident departs.

The largest driver of investment return for most retirement villages is the growth in value of the individual units within the village. The value of the units is in turn subject to the movements of the growth of the broader residential market, the level of demand, resident turnover and the operations available within the village itself. For example, a village with a nursing home near or close by will be usually be more expensive than a similar village without one as demand for such a village is higher.

This is possibly because couples want to be close to each other if one is in a home, or people don’t like to leave their local area when requiring more assisted living. Marinchek says he finds deferred management fee structures inappropriate because of the way the fees are used – fees paid out at the end of a resident’s tenure are not always justified as the amount spent on the property’s upkeep – and also because of the mentality they encourage. “If the DMF fee were used as a sinking fund – reinvested in the premises – then maybe it would be fair,” he says.

Marinchek is also uncomfortable with the idea of an investment fund receiving revenue each time a resident dies, or moves into a nursing home, or leaves simply because they didn’t like the place. “We’re suggesting going forward that there are going to be ways to fund aged care in a way that is sustainable, that creates quality product that is priced fairly for residents, and is obviously effective – providing investors with appropriate returns – where the investors are aligned with the residents: that they live as long as possible in their own home and have as much care as is required with the homes being accessible in terms of their configuration and economically affordable,” he says.

Marinchek says there are other ways of pricing and structuring the ownership of retirement village units in a way that will appeal to super fund investors. “They don’t want to benefit when their members die, when their members have to move out, or their members don’t have sufficient care. They’ve told us the opportunity to make money needs to be aligned with the interests of their stakeholders,” he says. “Investors have a choice where they put their money and they should fully understand what the underlying management teams are doing, what the properties look like, what the quality of care is, whether it encourages people to age in place or pushes them to move out: and whether it is wealth deterioration or wealth preservation for the underlying residents.”

Retirement living provider Australian Unity has been operating in the industry since 1948. The group executive for this sector, Derek McMillan, says Marinchek’s comments are naïve. “Unfortunately he doesn’t understand retirement incomes and funding capability in the sector to say he would do away with [deferred management fees],” McMillan says. McMillan argues that a normal residential apartment block can charge thousands a year for body corporate fees to go towards day to day maintenance and contingency funding.  However, you can’t charge retirees such fees as “they just don’t have that kind of money”.

 

“So what the industry does, in general, is charge these deferred fees so instead of taking this money every year the industry takes the money from the resident when they leave. So they defer the cost of these capital works and so forth,” he says. Whether Marinchek is successful in convincing investors that the better product is one with a more “appropriate” underlying ownership structure remains to be seen. But in the end, probably the clincher – as with any investment – will be the performance profile.

 

 

 

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