Housing slowdown, election weigh on retirement stocks

Gordon Macleod, Ryman Healthcare's chief executive. Photo / Nick Reed

New Zealand's listed retirement village operators face heightened pressure as cooling house prices and fears a more activist government may win this week's election threaten to end the companies' riding on the coat-tails of a pumped up property market.

The Reserve Bank first started noting the risk posed to the wider financial system by rapidly escalating house prices in November 2012, and since the September quarter of that year the CoreLogic house price index has climbed 50.3 per cent. That rise in house prices boosted gains retirement village operators make from reselling occupancy rights to the units, bolstering share prices. Since September 2012, Ryman Healthcare shares have climbed 122 per cent, Summerset Group has jumped 157 per cent and Metlifecare is up 98 per cent.

Still, the latest data from the Real Estate Institute showed the property market continued to cool with the number of sales across New Zealand sinking 20 per cent last month and the median number of days it took to sell a property increased to 37 from 30. Over the past four weeks, Ryman shares have shed around 4.3 per cent while Summerset is down 4.2 per cent.

That dynamic of a cooling housing market and a slower turnaround for sales has weighed on the retirement stocks, and investors are also wary about the growing debate on housing supply and affordability ahead of Saturday's general election, and the uncertainty about a capital gains tax under a Labour-led government.

"They have come under some pressure. Coming into an election, there are question marks over what a capital gains tax might mean," said Brad Gordon, investment advisor at Hobson Wealth Partners.

Retirement village operators do not currently pay a capital gains tax on the sale of the occupancy rights for the units.

While Labour's leader Jacinda Ardern has said its tax working group would look into a capital gains tax and if it recommended one, it would not take effect until after the 2020 election, a possible coalition partner - the Green Party - has said it would be a priority.

While it is not clear whether a capital gains tax would apply to the sector, UBS New Zealand analysts warn house prices could be negatively impacted by a change in government.

"Not only do higher interest rates and slower growth put downward pressure on house prices, but Labour, Greens and NZ First all have aggressive policies to lower house prices," they said in a note.

According to UBS, house prices could fall as far as 5 per cent by the end of 2018, below its current forecast of 4 per cent house price inflation.

"Given these assumptions, we expect the majority of stocks to fall slightly as a result of a change in government. In particular negative residential house price inflation does not bode well for the aged care sector," they said.

While Gordon agreed that the sector is "very much exposed to the fortunes of the housing market", he said up to a 10 per cent fall in house prices would have a negligible impact.

Retirement village operators tend to price the units at around half-to-two-thirds the median house prices in the areas they are located, providing them with margin room to hold pricing, said Gordon.

On top of that, demand is not waning. "The number of elderly people reaching that stage (where they might move into a unit) is not falling, it is growing," he said.

According to government data, there is a 90 per cent probability that the 700,000 people over the age of 65 in 2016 will increase to 1.32 million to 1.42 million in 2043, and to 1.62 million to 2.06 million in 2068.

Currently, some 12 per cent of the population over 75 live in retirement villages "and if that increases by only a couple of percent then these guys aren't building enough," said Gordon.

There are five listed companies on the New Zealand stock exchange: Summerset, Ryman, Metlifecare, Oceania Healthcare and Arvida Group, representing around 5.5 percent of the total $127 billion of equity on the stock exchange.

Oceania Healthcare has jumped 22 per cent since listing last May, while Arvida has gained 26 per cent since its December 2014 initial public offering. While Metlifecare is the second largest retirement village operator, Gordon said its portfolio is fairly mature and their development is smaller and so it has the lowest margins of the three largest.