I was most concerned this week to see the publication of an article by property spruiker Jennie Brown, endorsing retirement villages as a property investment strategy on the Australian Property Investor magazine website.

In the article, Jennie confuses retirement villages where residents buy a right to occupy which is re-sold when they leave, and rental villages where residents occupy a unit and pay a weekly rent under a standard residential lease. If you want to know more about how residents occupy a retirement village, check out my video tutorial HERE.

She says in the article “When the retiree passes on or moves away, their house, villa or unit becomes the property of the retirement village once again, with the resident (or their estate) receiving a small amount of their initial investment back,”. Well this is just plain wrong. The retirement village owner or operator always retains the freehold title to the property, with a resident’s right to occupy being in the form of a lease or licence. They don’t revert back to the village owner on exit, but are re-sold to the next resident. The out-going resident receives the re-sale proceeds, less any accrued fees and capital gains paid to the village owner (for more information on how this arrangement works, check out my video tutorial HERE). Furthermore, these villages have strict owner-occupier provisions and are simply not available to property investors. The closest you can get to investing in these types of villages would be to buy shares in a listed retirement village owner such as Aevum, FKP, Lend Lease or Stockland.

Jennie also says in her article that “retirement villages get to increase their rents twice a year in accordance with the biannual increase in government pensions, so with retirement villages the net yield you can expect will be high.” Wrong again! Here, Jennie is now talking about rental retirement villages, where a resident signs a standard residential tenancy lease with the owner of a unit that is located in the rental retirement village. Under these agreements, rent can only be increased in accordance with the lease document, which may or may not be in line with the government pension increases. If rents do happen to be linked to pension increases in the lease document, it doesn’t necessarily go straight into the investor’s pocket! The weekly rent paid by the resident has to cover village management, meals and laundry, leaving very little residual “rent” to flow back to the property owner.

As for investment yields, well, this depends on the price you pay for the property in the first place. Most of the units in rental retirement villages were sold to “Mums and Dads” investors around ten years ago at inflated prices through financial planners, who received massive commissions from the developer. The fatal flaw in the plan was that rents were linked to the pension, which meant that the miniscule pension increases “enjoyed” by our seniors did not keep pace with rents in the overall property market, and neither did they keep pace with the increasing costs associated with the delivery of meals and laundry in the villages. This has actually resulted in falling yields and greatly reduced property values, to the extent that the sum value of individual units in a rental retirement village in most locations are less than the price of the land they occupy!

I go into more detail about investing in rental retirement villages in my own article on the subject, which appeared on the same website some weeks earlier.

Jennie, may I respectfully suggest that you stick to the property sectors that you know, and keep out of the ones that you don’t. People listen to property educators such as yourself and you therefore have a responsibility to ensure that what you say is correct.

The recent takeover bid for listed retirement village owner Aevum by Stockland has thrown renewed interest onto the consolidation occurring in the retirement living sector. But is this consolidation a good thing or a bad thing?

In my opinion consolidation is good for the retirement living sector.

By way of background, up until 15-20 years ago, the retirement living sector was dominated by church groups and benevolent associations. The industry today is a very different beast and now only around half of all complexes are owned by the not-for-profits or benevolent institutions. The “for profit” corporations entered the market in the mid 1980’s, but withdrew following the property crash of the late 80’s early 90’s.

The late 90’s early 2000’s saw the re-entry of corporations, to the extent that between 2000-2008, most acquisitions of retirement villages or retirement village portfolios in Australia was completely dominated by listed property trusts and institutional investment vehicles, most of whom had not previously been active participants in the sector. This included listed property companies such as Aevum, Lend Lease Prime Life, Becton, FKP, ING, and Stockland; and institutional investment vehicles including the Retirement Villages Group (RVG), and the AMP Capital / Meridien joint venture. As a result of the Global Financial Crisis, these organisations have ceased their buying and are now focusing on managing their villages and new development pipelines.

The not-for-profit sector had been largely left behind in the orgiastic feast of consolidation over the later part of the last decade. However the planets have now aligned for this group, with current market conditions favouring those who had missed acquisition opportunities and are now actively expanding their portfolios. Private developers and owners who sold out to institutional buyers in the previous cycle are re-entering the market and are expected to again amalgamate large portfolios.

The entry of profit-focused companies into the retirement living sector has been good for the industry as a whole. “For-profits” have brought a level of professionalism, sophistication and market responsiveness that had been lacking with the domination of churches and other not-for-profit groups in the sector. As a buyer’s agent that communicates with retirement villages on a regular basis, I am often frustrated by the lack of disclosure and competence of retirement village sales staff.

Here are my reasons why I think consolidation is good for the sector:

1. The exit fee model under which most retirement homes are sold in this country requires a village owner with a strong balance sheet and/or a large portfolio, due to the volatile nature of the cash flows from this kind of business. The large “for profit” operators are conservatively geared (now!) and can provide balance sheet stability.

2. The larger retirement village owner/operators are typically listed on the ASX. This implies that the general public can access a pretty good level of transparency of the company’s financial situation, whereas with private and not-for-profit operators you never know how strong or precarious their financial situation is.

3. Large, listed retirement village owner/operators are extremely averse to negative publicity as this can adversely affect their share price. This makes them a little more motivated to resolve disputes with residents so they don’t end up as the headline story on A Current Affair. It is also easy for disgruntled residents to acquire shares and front the company’s directors at general meetings.

4. Larger organisation are able to pay their executives more money and, in theory, should therefore attract a better quality of manager.

5. Larger operators should be able to discount their stock in the lean times to make sales, knowing that they can make it back on the subsequent re-sale of the unit – smaller operators are hesitant or unable to do this.

6. Larger operators can provide better systems and training for village sales staff and managers.

7. Larger operators have less chance of going broke, preventing situations like this where retirement village residents live in fear of being turfed out of their homes.

What do you think? Do you agree with me?