Some investors in retirement villages suffered heavy losses during the financial crisis – primarily because they misunderstood the growth dynamics and needs of the market. As institutions again eye this sector with interest, they are refining their approach. SIMON MUMME and PHILIPPA YELLAND report.
For investors, retirement villages are not only bricks and mortar in discrete real estate markets. They are partially property plays, but also operating business and brand plays, says Sam Murphy, valuations director with Knight Frank in Melbourne. “If you speak to people selling retirement villages to residents, they can tell you that most of the reasons why people buy are not about bricks and mortar. It’s the community that people see themselves entering into, and how residents anticipate how their lives will change,” Murphy says. The operators who understand the importance of village services have reaped strong sales, even throughout the financial crisis. “Some have sold nine units each month during the global financial crisis,” Murphy says. “Their problem has been building the stock.”
But not all investors are worrying about providing more units. Some acquired villages at inflated valuations in 2007 and have since suffered as their growth expectations were proven incorrect. Refinancing these assets has also become more difficult as some lenders, such as BankWest, have withdrawn from the market. Among this group of investors are operators of national village franchises based on a ‘build it, and they will come’ model. In doing so, many were unaware of the strong role of the sense of belonging valued by residents in retirement villages. “Retirees often buy into a sense of community,” Murphy says. And if operators don’t deliver, they meet resistance from the market. But accurately modelling the capital growth of properties, and the income they generate, is also crucial to profiting from investments in villages.
Adam Coughlan, head of institutional business at Australian Unity Investments (AUI), says the capital growth experienced by retirement villages is typically less than commercial property and similar to residential property. But while the assets are usually worth about 70 per cent of the median house price in their corresponding localities, they do not deliver consistent income streams. Instead of collecting rental income from tenants, village operators receive large, one-off payments from each tenant at the end of their tenure. Known as ‘deferred management fees’, these payments are usually about 25 per cent of the ingoing price – or ‘buyin’ – paid by each resident at the beginning of their stay. Meanwhile, the capital gain of the property is split between residents and operators, and residents keep the lion’s share of their refunded buy-in. “The majority of the return – or at least half of it – is going to come from the property side.