Retirement village stocks feel the brunt of cooling property market

Listed retirement village stocks are feeling the brunt on a cooling property market. Photo/Aerial Vision.

Listed retirement village stocks have come under selling pressure since late last year on concerns about declines in the residential property market.

The big three - Ryman, Summerset and Metlifecare - have registered share price falls that have outpaced the overall decline in the sharemarket.

Since hitting a record high of 9375.97 late last September, the NZX50 index has dropped by 408 points, or 4.3 per cent.

Over the same period, Ryman has dropped 19.6 per cent, Summerset by 17.4 per cent and Metlifecare by 17.7 per cent.

All three had enjoyed a strong run leading up to the final quarter.

Analysts said a number of factors looked to be driving retirement village stock prices lower, the main one being concerns about property prices.

There were also worries about a weakening property market in Melbourne, where Ryman has a presence.

Some analysts suggested local retirement stocks may have weakened alongside their Australian peers after Prime Minister Scott Morrison's announcement of a royal commission of inquiry into the sector, following a string of incidents of neglect in nursing homes across Australia, in September last year.

In New Zealand, signs have emerged of a softer real estate market.

Early this month, Barfoot and Thompson's December house price data highlighted a very soft end to 2018 for the Auckland housing market, with both seasonally -adjusted new listings and sales contracting over the month of December.

Mark Brown, chief investment officer at Devon Funds Management, said signs of weakness in the property market were making their presence felt in the retirement sector.

"Notwithstanding the extreme over-valuations of Ryman and Summerset, it has been concerns over the residential property market that has investors in the retirement sector worried," Brown said.

"Ryman is particularly affected as its area of future growth is Melbourne where property prices have seen significant pressure," he told the Herald.

Residential property markets can influence retirement village economics in three key areas.

First, it can limit the ability of new residents to sell their own properties in order to afford and purchase a retirement unit.

Second, it can inhibit the ability for retirement village companies to develop villages profitably.

Third, the asset value of the village is determined by reference to residential property prices which, if negative, could see downward revisions to asset values.

Daniel Kieser, managing director at Shareclarity, said local stocks may have become caught up in the fallout from Australian royal commission.

"Investors may be pricing in a weaker New Zealand real estate market, which won't be helped by the shaky global markets or the enquiries into the Australian retirement companies," he said.

The bulk of retirement village earnings come from the sale and resale of occupancy rights agreements (ORAs).

"Obviously, if you are assuming price growth of, say, 1 per cent rather than 4 per cent, then the future income from these companies from re-selling those agreements is a lot lower," Matt Goodson, managing director at Salt Funds, said.

"They have a lot of leverage to future price assumptions," he said.

He said there were potential implications for retirement village balance sheets if there was a build-up of inventory.

"We are right now seeing very strong growth in the number of retirement village units hitting the market at a time when prices - particularly in Auckland - looked to have topped out," he said.

Goodson said retirement village stocks had performed very strongly over most of 2018.
"It's a business model that has done exceptionally well out of the cycle," he said.

"The question is: how does that model fare once the cycle starts maturing?"