Introduction
The investment experience of the seniors’ living and care industry was examined up to 2014. Since then, the industry has diverged with companies specialising in different components, retirement villages, manufactured home estates, rental retirement villages and residential aged care. The industry has changed significantly since the early 2000s and there are now new trends which this paper examines. It excludes not-for-profit (NFP) organisations, as they have followed different strategies in response to economic factors and Australia’s ageing population.
Pre-2014
The investment experience pre-2014 included distinct themes. These included entry into the industry by a range of organisations with diverse backgrounds, portfolio acquisitions by large (often listed) organisations resulting in consolidation and reliance on the Australian listed market for funds. Around 2000 a number of organisations entered the industry, including Becton, Prime, AMP, Stockland and Macquarie. This was followed by a period of consolidation assisted by the financial turmoil of 2008/2009, as the more strongly capitalised organisations were able to make acquisitions. The consolidation resulted in the “big four” of Stockland, Lendlease, FKP Property Group and RetireAustralia. The first three were listed on the ASX and were part of diversified property companies, whereas RetireAustralia was an unlisted “pure play”.
The period up to 2014 was one of consolidation, with smaller operators being amalgamated into larger (mostly) listed organisations. One trend noted (in the top left-hand corner) was Ingenia’s entry into manufactured home estates. These have gone from strength to strength and are now a distinct segment of retirement living; they deserve an examination separate to this.
There is some overlap between the poster up to 2014 and the next period of 2010 – 2024. The earlier poster looks at what was of importance then; going forward new trends became apparent from 2010 onwards.
The Next Period 2010 – 2024
The 2010s started with the majority of retirement village operators being part of diversified property organisations. Four main themes have been identified in the changes since then. First, there has been a move away from the ASX as a source of funding, replaced by large institutional investors. Second, the market for funding (debt and equity) has become broader. Third, New Zealand organisations have entered the market and established a presence. Fourth, operators have mostly grown through development of new properties (and redevelopment of older ones), rather than acquisitions.
With operators, three of the big four undertook a name change, the portfolios spun off by Stockland and Lendlease became Levande and Keyton respectively, and FKP Property Group became Aveo. This examination focuses retirement villages with a deferred management fee (DMF) and on larger operators. There are smaller for-profit operators who are mostly family based, for example TriCare and Baldwin Living.
Delisting and the New Money
Since the start of the 2010s, there has been a move away from the ASX for equity funding, with the big four now all unlisted. The new sources of funds include international institutional investors; Brookfield Asset Management (Brookfield) with Aveo, APG Asset Management with Keyton, and EQT with Levande. Local superannuation fund, AwareSuper, has invested in Oak Tree and Keyton. Listed fund managers have provided funding through the unlisted funds, including Cromwell with LDK and Blue Sky Alternative Investments with Aura. This follows trends seen in other industries which have observed a decline in using the ASX as a direct source of equity funding. There is still some reliance on listed markets, however that is the New Zealand Stock Exchange (NZX).
Levade and Keyton were placed in separate vehicles and then sold (fully and partially) to investors, effectively delisting. The prices paid were reported to be in line with book values. Aveo was delisted through a Scheme of Arrangement, whereby Brookfield made a cash offer for listed shares. The offer price of $2.15 per share was within the fair value range in the independent expert’s report, however it was at a 38% discount to net tangible assets. It was repeatedly argued during the 2000s and early 2010s that retirement villages were more suited to unlisted investors like superannuation funds. The lumpy cash flows from the DMF income are unattractive to listed investors chasing a regular bond-like income.
Newer entrants have avoided direct listing on the ASX, although some have received funds via vehicles managed by ASX listed companies. Listed organisations are required to comply with ASX rules including complaints resolution and investor communications. These require administrative teams which can be expensive to resource. Large investors want direct contact with senior management and decision-makers, and regular meetings have become part of the job description for retirement village senior management.
Events after 2010 highlighted the political risk which the retirement village industry faces. In 2017 there was an investigative journalist’s report into retirement villages, particularly the fees paid by residents. This was followed by state government enquiries and legislative changes which impacted on operators financial returns. The media focus and resultant financial implications were more easily handled in unlisted organisations away from the glare of ASX listing requirements. The downside to industry is that the move to unlisted funding reduces the amount of publicly available information. Regular reporting requirements meant that operators provided information on investment performance, including, discount rates, resident duration, resale prices and DMF structures.
Depth of the Market and Talent
Compared to the earlier period, funding is provided by international institutional investors, local superannuation funds and operator’s balance sheets. Despite some experiences in the earlier period, Australian retirement villages are attractive to investors.
In taking positions on retirement village operators, these new investors are providing more diverse and deeper sources of funding. This was evident with Aura, which had received funding from Blue Sky Alternative Investments, a Queensland-based listed investment company. Following a short sellers report into Blue Sky in 2018, an alternative source of funding was provided within months by Singapore-based SC Capital Partners. This contrasts with the post 2008/2009 experience where alternative sources of funding were difficult to obtain and expensive. This resulted in some operators being placed into administration, creating problems for residents.
Operators entering the market are different compared to the pre-2007 entrants. The earlier group were mostly diversified property companies and investment bankers seeing an opportunity with Australia’s ageing population. Many of them had limited experience of operating retirement villages, and expressed the opinion that they “were just like shopping centres”. The difficulties of achieving desired returns and the complexity of the industry, resulted in many exiting. The post 2010 entrants have decades of experience owning and operating retirement villages, plus they have sufficient financial resources. Large investors seeking exposure to Australian retirement villages consider these factors attractive.
Entry of New Zealanders
Compared to other countries with specialised housing for older people, Australian retirement villages have the most similarities, legally and financially, with those in New Zealand. Operators are well established, and the DMF fee structure is accepted by residents. Compared to Australia, there is greater reliance on listed markets. Listed operators include Arvida Group, Metlifecare, Oceania Healthcare, Promisia Healthcare, Ryman Healthcare and Summerset Group. Ryman and Summerset have entered the Australian market, establishing co-located retirement village and aged care facilities in Melbourne.
New Zealand investors have also entered the market. Listed investor Infratil has taken a 50% position in RetireAustralia and New Zealand Superannuation holds the remaining 50%. It has been announced that they are undertaking a strategic review of this holding.
Growth Through Development
The previous period featured growth through acquisitions, with larger operators accumulating properties and portfolios through a variety of processes. The underlying mantra was that bigger was better and that there were efficiencies of size and scale. Growth through acquisition resulted in challenges as many portfolios contained assets of variable quality. The ongoing implications of poor-quality properties on returns and resources became apparent to many operators. A throwaway comment from one operator post-2010 was, “You buy someone else’s village, you get someone else’s problems”.
While there are still some selective purchases, growth is predominantly through new developments. These new developments align with the strategy of each organisation. Oak Tree focused on the affordable market with smaller villages in regional locations. The New Zealand companies developed co-located retirement villages with aged care in Melbourne. Established operators like Aveo have developed vertical retirement villages in Newstead in Brisbane and Bella Vista in Sydney.
Growth through development is slower and more organic compared to grow through acquisition. Gaining regulatory approvals, particularly in established urban areas can be time-consuming . All operators acknowledge that the approval process, particularly achieving financial feasibility within this process, is expensive and time consuming.
Conclusion
This examination shows how the Australian retirement village industry has evolved further. It has benefited from the growth in international investment markets resulting in wider sources of funding.
The big four are all pure plays, focusing on retirement villages. Previously three had been components of a diversified property development and investment organisations. Some of the pre-2010 investors considered retirement villages to be another property play. Pure plays with the sole focus on retirement villages, demonstrate the requirement for skill sets different from general property. Personnel have specialised in operating and owning retirement villages. This expertise is valued, further contributing to the growth of the industry.
There are other types of specialised housing, including student housing and build to rent. Diversified property companies and larger investors are targeting these property types. It will be interesting to see whether any of these follow a similar evolutionary trajectory to retirement villages.
References
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