NZX-listed retirement village company share prices are being hammered by the housing market downturn, according to a new report.
Andrew Steele and Nick Yeo of Jarden released a study, No Sign of Improvement in Aged Care Funding or NZ Housing, citing a Government funding increase of 3.5 per cent, whenone industry group sought more than 9 per cent.
"Taking account of inflation, the [Real Estate Institute] house price index is now negative in real terms year on year," the analysts noted.
The number of days to sell a house continues to rise while sales volumes stagnate at levels not seen since 2014.
"These two elements in combination suggest further near-term price weakness. This negative near-term outlook is also seen in house price sentiment surveys, which are at levels not seen since the depths of Covid uncertainty in March 2020. We do not expect sentiment to start improving until house prices stabilise," Steele and Yeo wrote.
The REINZ house price index was down 10 per cent from its peak last November and ongoing weakness remained a key sector headwind for retirement stocks, the analysts said.
The listed retirement sector had declined a further 8 per cent on average from the end of May and was down 37 per cent from the peak last September.
Ryman Healthcare has suffered the most, its share price dropping 43 per cent since its peak last September.
Arvida Group had been the best performer but its share price was still down 31 per cent, they noted.
Jarden picked Summerset Group as its sector preference.
"Summerset continues to be our preferred retirement operator given its attractive medium-term earnings growth, a large and diversified development pipeline, the emerging growth opportunity in Australia and a flexible balance sheet. Importantly, we believe Summerset's pipeline diversity, balance sheet strength and flexibility all provide the greatest optionality versus peers for the valuation entry point," Steele and Yeo wrote.
Oceania Healthcare had an attractive valuation upside, an appealing and large development pipeline and a conservative balance sheet.
"However, these appealing elements are tempered by a large aged care business, which we expect to remain a drag on profitability in the near to medium term. Risks are HPI, housing market turnover, aged care funding, regulation, cost inflation," the analysts said.
Graham Wilkinson is encouraging longer-term thinking in the sector. Photo / Supplied
Retirement Village Association president Graham Wilkinson questioned conclusions about the share price drops.
"Everyone who's been in the business for a while understands this is a very long-term business. As silly as it was going high, it's just as silly going low. The valuations do not reflect cash reality. Now's the time to be buying these shares," Wilkinson said.
Share price volatility did not affect the longer-term outlook.
"The key issue is not necessarily house prices but the affordability of a retirement village. Villages have sold products for around 70 per cent of house prices in an area. Unit prices didn't increase as much as house prices, hence there is somewhat of a buffer," he said of prices being asked by villages.
That made them even more attractive.
"We sell safety, security, peace of mind, the certainty of costs and a pathway to care and that's what we provide and it's what the market wants, regardless of house prices. To turn around and suggest a 43 per cent reduction in share prices simply doesn't reflect that. There's still a large cohort in the population needing and wanting the value proposition. To get into care these days, the way it's heading with beds shutting down, you won't be able to get into care," he said of high-level rest home or hospital-level geriatric care.
"There will be a shortfall of tens of thousands of beds the way we're going," he said, blaming low Government funding.
Arvida being forced to close a Timaru care home/hospital at Strathallan was concerning.
"Arvida's situation was about staffing," Wilkinson said.
"There's a tsunami of aged people coming," he said referring to population demographics.
"No matter how much you keep people at home, we're going to need another 20,000 to 30,000 [aged care] beds during the next 25 years. The only people building aged care are villages. During the last five years, villages have built many new care beds but around 1000 care beds have shut so the net increase has only been 2000 care beds.
"The numbers going forward are pretty scary."
By 2050, New Zealand is forecast to need around 140,000 care beds, he said.
"Yet in the last five years, we've got a net 2000 - so the chances of us achieving anything like that is extremely remote unless there's a major about-turn by the Government. The outcome is going to be not enough beds and too many elderly people. The people with funding will cherry-pick the good places. It's hardly a blueprint for equity in New Zealand. No one in Government gets it," Wilkinson said.
"I'm pretty optimistic still for our village sector because the product obviously is appealing. More than 100 people move into a village every week," he said.
• The Retirement Village Association holds its annual conference in Christchurch from August 23 to 25 and expects more than 1000 people to attend.
