Golden years' industry faces questions

Michael Nimot has raised doubts about retirement villages. Photo / Dean Purcell

An ageing population has been a bonanza for retirement village companies and their investors, but will the good times go on?

Losing 20 to 30 per cent of the equity in your property, not sharing in any future capital gain, and opting right out of the real estate market by buying a retirement unit - sound like a good idea?

Not necessarily, says Michael Nimot, an expert in the industry, registered valuer, former Metlifecare development manager, and health and aged care director at JLL (formerly Jones Lang LaSalle).

As an insider, he has raised doubts about a sector which seems unable to put its corporate foot wrong, though he doesn't go as far as calling himself a whistleblower.

With colleague Angela Webster, he has just published the 15-page New Zealand Retirement Village Database Whitepaper, which raises many questions about the sector from the consumer's viewpoint - as well as the industry's.

Working for one of New Zealand's biggest real estate agencies and consultancies, Nimot has raised serious issues. He challenges the received wisdom that the retirement sector is a great financial bet in every way and can only go up - for the giant NZX and unlisted companies which sell the golden oldie dream of living a happy and secure life in a village, the analysts who study the sector and the institutional investors who sing its praises.

But maybe, says a wary Nimot, buying a retirement unit is not such a grand idea for the residents or their families, as house prices skyrocket and many parents attempt to help their kids get on to the property ladder.

Retirement villages charge new residents hundreds of thousands of dollars to buy a licence to occupy - you don't buy the unit. Then there is a $100-plus weekly fee to cover operating costs. And at the end, when you die or move out, operators charge a deferred management fee (DMF) of 20-30 per cent of the initial cost. Occupiers miss out on any capital gain if the value of their unit rises, and sometimes have to pay for any capital loss.

Traditionally, retirees sell the family home to pay for a village unit, but Nimot fears that if home ownership keeps falling, fewer people will be able to make that move. Compounding the problem, even if older people do own a home, they may feel pressure to help their children and even grandchildren buy their first property, reducing the amount available to spend on a retirement unit.

Nimot has called for people to think about entirely new models, saying what we know today might not be the face of retirement in the future.

But a spokesman for Ryman Health, one of the big three village operators listed on the stock exchange, says falling house prices in 2008 and 2009 "had little impact on us" so he dismisses the idea of pressure from the next generation stopping the elderly from buying into the villages. However he does not entirely dismiss part of Nimot's argument.

"Falling home ownership numbers is a factor at the lower age bracket. People may be deferring buying a house but that is not flowing through to us at this point," the Ryman spokesman says.

As for the 20-30 per cent DMF hurdle, "that's for individual families to decide", he says.

Alan Edwards, the managing director at Metlifecare, another listed retirement village company, also dismisses Nimot's fears. "It is generally accepted that the penetration rate for people over the age of 75 living in retirement villages is approximately 10 per cent. We do not envisage that home ownership will reduce that significantly so as to impact penetration rates," Edwards says.

Julian Cook, chief executive of Summerset Group, another NZX company, says home ownership in the 75-plus age bracket is about 80 per cent in most parts of the country, which he says reflects every Kiwi's dream of owning their home.

"Although affordability is tightening currently, which is likely to be affecting first-home buyers the most, there are a number of initiatives under way which over time will address supply constraints and affordability," Cook says.

"Ultimately, our industry is here to serve the needs of older New Zealanders and we are looking at a tripling of the over-75s in the next 40 years as well as increasing interest in retirement village living."

Guy Eady, chief executive of another retirement village company, Oceania Group, says questions about supply, the DMF system and the effects of a housing market downturn are better answered by a valuer who assesses business risk.

Nimot asks whether New Zealand should perhaps be thinking of developing rental retirement villages or building secure gated communities specifically for the elderly, offering them the option of leaving easily if they don't find themselves living the dream.

"The current model may have to change due to affordability, falling home ownership and those retirees and their families not being happy with losing 20 to 30 per cent of their equity and not sharing in any future capital gain. This is a key issue and really impacts on people's decision-making process," says Nimot from his level 16 office in Auckland's waterfront PwC Tower.

Places in many Auckland retirement villages already cost $600,000 to $1 million, so beneficiaries of residents' estates and their advisers "may not be happy with losing 30 per cent as well as the future capital gain", he says.

He is questioning whether a new model is needed for the future, doing away with deferred management fees.

"That may mean that there is a lesser or no DMF, a share or full capital gain and limited community facilities," he speculates. Retirement units which can be rented are another option, and would be less of a bind than buying into a village.

The former chief executive of Summerset Group, Norah Barlow, has also questioned whether today's model doesn't need changing, and wonders if rental units are an option for the developers to look at. She remains influential in the sector and is still on Summerset's board.

But while Nimot questions the status quo, he says he is planning to buy a retirement village unit himself once he reaches his mid-70s. He remains convinced people who move into villages live longer and he has personal family experience to back up that view.

"I believe that villages offer a better long-term option than home care or ageing in place due to the tangible benefits and also in my opinion that living in a village does extend your life.

"However the entry cost and the issues raised above may preclude a lot from being able to get into a village," Nimot says.

Barlow is not convinced falling home ownership will hurt her sector. "These are not really going to hit for quite a few years."

But she does think smaller villages built around a community hub and perhaps villages in the country could become more popular. These could be more of a commune than a commercial model, but she says New Zealand has difficulties making new retirement village models work financially.

She defends the DMF model, saying it works well by keeping initial capital costs low "and back-ending the payments relating to the large repairs, the communal areas and profit. It may be that this structure gets under challenge but really more, I think, because people don't understand the reason their parents made the initial decision, with the lower cost and advantages of the retirement village living."

As for the future, retirement villages can only become more popular and numerous as government support for rest-home care reduces, she believes.

Is Auckland about to build too many retirement units?

Michael Nimot of JLL (formerly Jones Lang LaSalle) says the region potentially has a looming oversupply. His research report this month highlights "some indication of potential short-term oversupply within the Auckland region", citing operators' excessive landbanking activities.

"There is a potential short term oversupply of [retirement village] stock in Auckland should all the pipeline planned come online at a similar time; particularly if they compete for the same socio- economic group with similar pricing and product range."

On top of those issues, he raises the problem of rising unit prices and village operators depriving people of useful housing land, by gobbling it up and banking it for their own future developments. "The pressure on the publicly listed companies to keep the pipeline going as strong as it is will probably result in increased prices for suitable sites and will therefore put upward pressure on prices for sites that could be used for alternative housing, i.e. a standard residential subdivision, gated communities, and/or low cost housing," Nimot says.

However retirement village operators dismiss his views, scoffing at oversupply forecasts.

Simon Challies, Ryman Healthcare chief executive, says the build rate is only high because this is a boom time.

"When the market slows, the build rate slows. The 2000 [units] build rate was achieved in the past year, but hasn't been achieved in any of the six years prior.

"If you look at the last seven years the build rate has been much lower. There are a lot of new builds proposed, but, as we've seen over the past seven years, they don't always proceed. They are long- term projects in any event."

Alan Edwards, Metlifecare chief executive, says oversupply is a misleading term if used to describe the broad Auckland retirement market generally. "Competition is always localised within suburbs given that 80 per cent of the residents in any one village would have previously lived in close proximity to the village they selected. That suggests that villages will potentially compete only if they are relatively closely located.

"The reason we say 'potentially' compete is that some villages in close proximity do not compete because they serve a different socio-economic segment and/or they offer a differentiated product. It is for this reason that villages can be in close proximity and thrive."

Julian Cook, Summerset chief executive, says that based on demand in the Auckland-region catchments where his villages operate, the company expects no issues.

"In Warkworth, Hobsonville and Karaka where we are building presently we are seeing very strong demand. We also continue to seek more sites in Auckland and the wider region. We are always mindful of potential oversupply and assess this very carefully in all our site acquisitions. Over the medium to long term there is significant demand growth forecast in the Auckland market.

The staging of villages over a number of years also provides operators considerable flexibility to match supply to demand."