Investing in Seniors Living
Australia’s ageing population is driving such strong demand for retirement villages, that supply is struggling to keep up. In this guide we dive into the fundumentals of investing in seniors living.
In 2016 there were over 3.3 million persons aged over 65 in Australia.
For those who choose seniors living roughly: 46% live in aged care facilities; 31% live in DMF style retirement villages; 6% in rental type retirement villages; and 17% in caravan and MHE parks (Figure 1).
About 184,000 Australians live in retirement villages, or 5.5% of the over 65 population. This reasonably low penetration rate reflects the fact that a significant majority of seniors live at home or with family. A Colliers International report suggests the market penetration rate increased to 5.0% in 2010 from 3.5% in 2001 and has substantial capacity to increase further.
According to the Property Council of Australia there were about 2,200 retirement villages in Australia in 2014, with about 141,000 independent living units.
Supply & Demand
According to the Australian Bureau of Statistics (ABS), the number of people aged over 65 in Australia is expected to grow by 156% between now and 2055. This is almost three times the rate of growth of those aged less than 65 years.
In 2040 there will be 677,000 people 65 or older. If the current penetration rate of retirement village usage remains the same (i.e. 5.5%), Australia would need 285,000 independent living units by 2055 or an annual build rate of 5,300. If penetration rates increased to that of the U.S. (i.e. 10%) then Australia would need 378,000 independent living units or an annual build rate of 14,000.
The number of retirement villages has been increasing by about 4% p.a., or 4,000 independent living units.
Seniors Living Categories
Retirement living accommodation covers a spectrum of different classifications, from senior apartments all the way through to age care (skilled nursing and acute hospital care). Sometimes people use the definitions of retirement villages and age care to define the two different spectrums.
Age Care is government funded, carries far more regulations and is more labour intensive than independent living. Increasingly it is becoming more common to find age care facilities within a retirement village with independent living so to cater for couples where one partner requires extra care. At the moment these villages generally have waiting lists as opposed to villages with no age care facilities.
Independent Living Units
These are designed for seniors who want to retain their full independence but have access to the security, companionship, facilities and services of a senior living community. Facilities need to offer attractive, spacious units within a friendly community atmosphere. While residents enjoy a completely independent lifestyle, they have the assurance that help is always available at the touch of a button by offering the key benefit of 24 hour emergency assistance.
Assisted Living Apartments
Serviced Apartments are designed for seniors who require extra care in their day-to-day life or who wish to free themselves of cooking, cleaning and heavy laundry duties. Residents are able to retain their independence whilst having more time to pursue their own interests and enjoy a range of organized activities and entertainment alternatives.
Skilled Nursing is designed for seniors who have limited capabilities to cope with day-to-day living, and covers the provision of a higher level of direct care than is provided in assisted living serviced apartments, as well as all meals, cleaning services, a regular linen service, building and garden maintenance.
Acute Care (Hospital & Nursing Home)
Nursing Homes and Hospitals are government-funded and provide quality nursing care support for those who need a high level of care and assistance. Potential residents are selected by the Aged Care Assessment Services and residents will pay a weekly fee determined by the Commonwealth Department of Health and Aged Care.
Operator Revenue Models – DMF, Rental, MHE
The three main business models that exist in the Australian Retirement Living sector are:
- Rental retirement villages;
- Manufactured Housing Estates (MHE); and
- Deferred Management Fee (DMF) retirement villages.
Rental type retirement villages typically don’t require the resident to pay a lump sum upon entering the village, but rather charge a weekly rent. This form of retirement accommodation is suited to retirees who are reliant on pension and/or rent assistance.
Under the Manufactured Housing Estates model the resident acquires a manufactured home from the operator (usually 30% below the local median house price). However the land remains the property of the operator and therefore the resident enters into a long term ground lease with the operator and pays them a weekly ground rent.
In contrast to the ongoing cash profits recorded by the Rental and MHE models, the DMF model reports ongoing accounting profits but receives cash flow only at specific times – generally when the site is first sold and at each subsequent re-sale.
DMF structure yet to convince
The nature of the DMF model means that there is the potential for cash which is received not matching what is accrued in the income statement. Cash flows under the DMF model arise when residents terminate their occupancy and a new resident takes up that unit, however in the meantime the company receives no cash even though it accrues DMF fees. This has caused some disgruntlement by investors, particularly when there are no other business activities to supplement cash levels. Many argue this is a byproduct of an industry which has yet to reach maturity and in for the system to effectively work it requires stabilized villages beyond 10-12 years, however others argue that under this system DMF accrued numbers will never match cash levels.
Development activities have been poorly managed
Over reliance on development profits has been a major downfall of a number of listed retirement living companies. As a result there is now much tougher scrutiny over development activities by listed operators, particularly in terms of development revenues as a proportion of net profit, depth of pipeline, whether activities are done off/on balance sheet, and whether the project is a Brownfield or Greenfield development. Operators with a strong track record in development therefore have a better ability to mitigate development risk.
A large component of existing retirement village stock was constructed in the 1960s and 1970s and faces the risk of obsolescence as the first wave of Baby Boomers reach retirement age. In the 1960s, the majority of villages targeted single residents with average entry age of 72 and provided mainly small one-bedroom and two-bedroom units. Today, the newest retirement villages are targeting couples ranging from 65–72 and offer a wider range of mostly two-bedroom and three-bedroom units, as well as a sophisticated level of community and recreational services.
Performance of Listed Players
Investing in seniors living in the listed market has been, until recently, difficult. Despite the strong thematic the performance of listed retirement living operators has been very poor. Generally, problems were due to either bad management, incorrect business strategy, or over exposure to property development.
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For more information on commercial property in general, read our article Investing in Commercial Property – The Ultimate Guide.