Australians are living longer than ever. Over the past two decades, the number of elderly people increased by 161%, compared with a total population growth of 29% over the same period. In the 12 months to June 2006, the number of people aged 65-plus increased by 65,400 (2.5%) to reach 13.3% as a proportion of the population. Furthermore, the number of people aged 85 and over increased by 25,100 (8%) to reach 338,000.
As a consequence of these changing demographics, investment opportunities in the retirement and aged care sectors are becoming increasingly sought-after. But this dramatically changing market may not be for everyone...
Healthcare and retirement are the two principal sectors and, according to Roger Klem, national agency director - healthcare and retirement living, Colliers International, "it's like comparing cheese and ham! Aged care is a totally different asset class. It's a business play."
Aged care facilities - previously known as nursing homes - tend to be funded by the federal government. They are administered by a range of acts and the sector is heavily influenced by government policies and controls.
"All operators must be approved by the government and the funding is principally provided by them," Klem explains. "Major Australian institutions love the fact that the income stream is deemed to be as good as a government bond so long as you can maintain occupancy and funding and keep your costs under control."
Klem adds that yields in the sector are "tight given recent pricing" with corporate demand typically producing total returns of around 10%. Purchasers should be very wary of old facilities that no longer meet government compliance, however, and while the high government involvement may be off-putting, Klem predicts an increase in demand.
Retirement is a "much more straightforward property play" than aged care, Klem says, because it lacks "the complexities of third party government controls, intervention and the high levels and expenses of staffing".
There are two major income streams within the retirement community sector, with developers profiting from construction and first-time sale of independent living units (ILU) or serviced apartments (SA).
Then there's the deferred management fee (DMF), which is the amount that the village owner retains each time the unit is subsequently sold, typically around 20-35% of the resale value.
"The sale of the DMF component has become big business with over $1.5 billion having sold in the last year to major listed and wholesale property funds such as FKP, Aevum, AMP, Stockland and Babcock & Brown," says Klem.
Residents occupy their units in Australia typically under a loan/lease or loan/license arrangement which, given legislative protection, is considered to be as acceptable as freehold title.
A number of strata title villages also exist, allowing for individual ownership, and the DMF is calculated through some form of management agreement. This is a component with a more limited market, according to Klem.
While there are many restrictions on investors when it comes to the retirement sector, they do have their flipsides. "Most restrictions are positive," says Steve Biggs, project director, Homestead Life. "As the site is controlled and managed, residents are usually respectful of property, they attract like residents (tenants) for social interaction and costs are generally stable and known over a period of time."
How to buy
Investors can get into the retirement sector directly, or indirectly, through a listed property trust (LPT). The latter involves buying shares in a company such as FKP or Aevum on the Australian Stock Exchange (ASX).
Prime Retirement & Aged Care Property Trust (Prime Trust) is the first public property trust dedicated to the senior living asset class, and one of Australia's leading owners of retirement resorts and aged care assets.
"Senior living asset class is now the term for retirement villages and aged care accommodation," explains Philip Powell, director - Kidder Williams, Prime Trust's corporate advisers. "This area has been the preserve of wealthy individuals, church groups, large super funds and some corporate players. Recent developments have now seen this property class readily available to mums and dads with ASX liquidity."
With 40 retirement villages and aged care facilities recently listed on the ASX, Prime Trust provides access to the senior living asset class in the same way that Westfield provides access to the retail sector and GPT the office sector.
"In broad terms [we] own the retirement villages and receive management fees and capital growth on the rollover of units", Powell explains. "The residents fund via their own contributions the running costs of the villages, including staff and community facilities. Effectively this gives your mums and dads-type investor the ability to invest where otherwise they wouldn't be able to do so."
With yields "just a little bit north of 9%", it's an attractive, fully tax-deferred prospect. "You don't pay tax on it; it reduces your tax cost base so that when you eventually sell you obviously have a higher capital gain," says Powell. "A lot of people find that attractive that there's no tax payable on that return as it comes in."
The average occupancy of a retirement village is 10 years, at which point the likes of Prime Trust sell the unit on. While the previous resident gets back some of their money once the maintenance fees are taken out, any capital gain which has occurred is usually retained by the trust. "That all comes back as income into the trust and hence income into the members of the trust," says Powell.
Smaller investors shouldn't be put off by the confusing talk of LPTs and DMFs. "On the contrary, I think this is where people like that should be," says Powell. "You're getting return, you're getting security and you're getting into an area which has got excellent demographics."
But for any investors who think they can compete with the big boys, Klem has some words of caution: "You can't go buy a $500m office building yourself just because you think the CBD office market is going to show heaps of growth and great value. It's exactly the same in the retirement sector. These companies have gone out and accumulated; it's been something like $1.5-2 billion-worth sold recently. That's an interesting phenomenon in itself. It means that market's changing dramatically."
Klem also advises that the income streams that come out of retirement villages are "extremely bumpy", making profits difficult to predict. "You might not get any income out of it for 10 years and then it all comes out in one hit, or you might get it out next year," he says.
This explains why many LPTs want to buy many thousands of units at once. "Yields for the DMF component are hard to determine given bumpy cash flows, hence the need for a large number of units to spread risk," Klem says.
Estimating yields is therefore a "very, very difficult calculation to undertake - a rental yield's going to be comparable to standard residential, which might be only 3-4% net, or around 5% gross return. It is incredibly complex."
The next tier down is the affordable housing in the retirement sector, also known as the pensioner market. This tends to focus on people who live on the periphery of a city, who don't have the capacity to own their own home so they choose to pay a percentage of their pension in rent.
The third option for investors involves buying a unit direct, which is then rented to those third parties. There are many rules at play however, and they vary from state to state and from development to development. Some communities insist not only that residents be over 55, but that investors are also in this age bracket. "That accommodation is likely to be strata-titled and restricted by law that it can only be occupied by somebody over the age of 55," says Klem.
One reason for this is that some strata title retirement village managers capture a fee based on the subsequent rollover of that unit. A 75-year-old who buys, then lives in for 10 years before going into a nursing home would therefore be a more appealing prospect than a young investor who doesn't want to sell up, as this would prevent the owner from netting their DMF.
"It's not straightforward," says Klem. "It is an extremely specialised field. There would be very few people who would go and invest in it directly."
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