With too much capital chasing too few so-called “hard” assets, institutions have started scanning the long-neglected sector of retirement living for alternative investments.
Retirement villages have been the least attractive segment of the broader residential market.
It is an attitude that defies logic.
Given Australia’s demographics, the industry, estimated to be worth around $50 billion in 2010 (no current figure is available), offers a strong thematic investment.
Simon Owen, the well-regarded chief executive of listed Ingenia Communities, is fond of saying ageing is the one certainty in a world full of uncertainties.
Deloitte counted senior living as one of its 25 sectoral growth hotspots in Australia in a 2014 report, Positioning for prosperity? Catching the next wave, forecasting annual 5.1 per cent growth through to 2033.
The facts may be starting to dawn on institutional investors.
More than $1bn worth of transactions in retirement villages have taken place in recent months, mostly between late 2014 and June this year.
The buyers included a sovereign wealth fund, US private groups, a pension fund and large listed trusts. The latter are bulking up their portfolios to reinforce their market positions and further expand their economy of scale in the retirement sector.
Among the current wave of investors is the US private equity giant Blackstone, which plans to inject $150 million into a new partnership with National Lifestyle Villages, a retirement park developer based in Western Australia.
The stand-out deal was the sale of Retire Australia, Australia’s fourth largest retirement operation, for $640m last December to the New Zealand’s sovereign wealth fund, New Zealand Superannuation Fund, and the New Zealand listed asset manager, Infratil.
Lend Lease, which already has the largest retirement and senior living platform in Australia, outlaid $210m in acquisitions, according to the company’s 2015 full year report.
Lend Lease acquired Retirement Alliance, which owns villages in choice suburbs in Melbourne and Sydney and two upmarket Waterbrook villages in Sydney.
In June, Stockland paid almost $76m for eight retirement villages in South Australia, lifting its portfolio by 980 homes and a development pipeline of 130 units.
As a business model, the sector only makes sense if it is a sizeable operation, front-loaded with development profits.
Scale is important to achieve an annual resident turnover rate of 8-9 per cent. Profits from the sale of new units, together with deferred management fee payments and a share of capital gain from departing residents, provide the cash flow and profitability for the operator.
The bugbear for investors in retirement living has been the deferred management model (DMF), which is unique to Australia and New Zealand. Under this model, management fees are deferred and collected when a resident departs and his or her unit sold.
DMF has always been -- and still is -- a convoluted model. There is no universal formula -- the legacy of a highly fragmented industry.
But things are changing as the large operators expand their reach, swallowing up small operators.
Now, it seems, the DMF model is not necessarily as big a deterrent to some investors as previously thought. The industry’s strong growth prospects, coupled with the strength and quality of operators/developers like Stockland and Lend Lease, are compelling enough into entice investors to this asset class.
Market sources say that Stockland and, possibly, Lend Lease, may hive off their multi-billion retirement living portfolios into wholesale funds over the next 12 to 18 months to feed the growing appetite from pension funds and other institutional investors for alternative real estate investments.
Ingenia’s Simon Owen and key industry agent, Phil Smith, Colliers International’s national director, healthcare & retirement living, agree that institutional dollars are starting to flow into the sector.
Smith says few green retirement villages are being developed, and when a good portfolio is marketed, the big operators snap it up.
Institutions wanting exposure to retirement living have to turn to the sharemarket for retirement living stocks.
Today, the single largest investor on Ingenia’s register is the huge New York fund manager, Cohen & Steers, which holds more than 10 per cent of its securities. Ingenia’s largest security-holders are all institutional investors.
Michael Peet, Commonwealth Bank’s real estate analyst, believes Ingenia will enjoy strong growth, underpinned by the macro factors -- the ageing of Australia and housing affordability -- over the next five years.
A new group, Gateway Lifestyle, raised $300m in an IPO and listed on the ASX in June at $2 per security. Veteran stock picker Winston Sammut says the stock is now trading at $2.52.
Moelis analyst, Hamish Perks, shares Sammut’s optimism on the “quality company, with favourable demographic and market tailwinds”. Perks noted recently that since its IPO, Gateway has delivered a 20 per cent total return.
Another listed group, Eureka Group, is also enjoying the attention of investors and analysts.
In a recent note on Eureka, Canaccord Genuity analyst, Owen Humphries, wrote: “The company holds ambitions of becoming Australia's largest owner/operator of regional seniors rental villages. In our view, this could come sooner than most investors expect.” The firm has a BUY recommendation on the stock.
The sector itself has also been evolving to appeal to investors – and potential residents – both by offering affordable housing and updating its image.
For some reasons, the term “retirement living” does not go down well with Australia’s ageing baby boomers. Hence, less than 6 per cent of over-65s in Australia live in retirement villages, compared with 10 per cent in their cohorts in the US.
Lend Lease has moved into upmarket offerings, as with its acquisition of the Waterbrook villages, which offers sumptuous accommodation with country-club-like amenities.
Ingenia and Gateway produce manufactured home estates offering lower-cost housing in park settings. Ingenia is selling eight villages operating under the DMF model to shift into the manufactured home estates. While Eureka offers rental homes in its villages for those who want the flexibility of rental accommodation.
All in all, the range of offerings in retirement living today is vastly different to the industry of a decade ago.
The current flurry of activity signals yet another round of consolidation of a sector that was born out of a cottage industry.
The last round of rationalisation took place in the mid-2000s when large companies -- such as Macquarie Group, the Hague-based ING Real Estate Group and the collapsed Babcock & Brown -- sought to corporatise the industry.
But debt-fuelled expansion came undone for all but the groups with the strongest balance sheets.
In the aftermath of the global financial crisis, US private equity groups, including JP Morgan, Morgan Stanley and the Apollo Group, actively looked for distressed assets in the sector.
JP Morgan snared the best deal when in 2010 it took over a stake owned by AMP Capital Investors, in what was then the AMP Meridien Retirement business (since renamed Retire Australia) – for a token one dollar. The US investor assumed the responsibility for its debt.
Subsequently, JP Morgan brought Morgan Stanley into Retire Australia and, together they recapitalised and rebuilt the business into the fourth largest in Australia. They exited with a tidy profit last December.