You didn’t hear it here first – New Zealand’s retirement village industry is booming. The recent Jones Lang LaSalle (JLL) Subscriber New Zealand Retirement Village Database (Subscribers NZRVD) concluded that the growth in demand for retirement village living has been “nothing short of spectacular”.
A good time to be in the game
Operators are building units as fast as they can to keep up with demand. According to JLL’s research, in the next three to five years we’re likely to see retirement village units increase by around 62 per cent. More than 80 existing villages have around 6,000 units at some stage of consent or construction and an additional 65 villages have plans for around 10,200 units. That’s a lot of growth.
Everything stacks up nicely for operators at the moment. The ageing population is on the rise as the baby boomer generation start to make their presence felt. And more older people than ever are opting for retirement village life, as booming house prices mean they can sell their family home for a fine sum and comfortably downsize into an environment more befitting their needs.
Furthermore, people have become more accepting and trusting of the licence to occupy model, and regulatory measures as set out in the Retirement Villages Act 2003 and the Code of Practice 2008 help to keep things transparent.
It might be plain sailing for operators at the moment, but experts in the banking, investment and property sectors say there are many factors to be mindful of going forward.
The housing market
Given that people typically need to sell the family home to buy a retirement unit, are falling home ownership rates likely to affect retirement village businesses?
ANZ healthcare, commercial and agri-relationship manager Reuban Dalzell believes home ownership rates could have an effect.
“As home ownership is linked to affordability, which varies across the country, those larger businesses with scale and geographical spread can spread this impact across different markets. The outlook remains positive, however, with increasing penetration rates and wealthier baby boomer generation with more diverse asset sources entering the market.”
ASB’s client director Ross Currie doesn’t see home ownership levels presenting any short-term risk to retirement villages.
“Home ownership rates are high in the heritage and baby boomer cohorts and generally homes are unencumbered by the time the owners are contemplating moving to a retirement village.”
Currie says that in the longer term falling ownership rates could mean increased risk that owners find it more difficult to release their equity to purchase an Occupation Right Agreement, although he says ownership rates would really need to plummet for this to eventuate.
According to JLL, home ownership rates were at 68 per cent in 2001, 67 per cent in 2006 and 65 per cent in 2013. JLL experts Angela Webster and Matt Straka believe this slight downward trend is counterbalanced by the strong growth of the population, resulting in an increase in the actual numbers of homeowners. They don’t envisage it having any adverse effect on retirement villages.
However, an ageing and declining population could also reduce overall demand for housing. Take Japan, for example, where there are now many vacant properties in previously fully occupied suburbs and residential prices have fallen in line with reduced demand – all due to an ageing and declining population.
“Based on the latest census data, this scenario could play out in New Zealand post-2060,” says Currie. “The unknown variable is immigration that may delay the ageing population effect.”
Oversupply of retirement village units
A lot of retirement village development has taken place in recent years, and more is on the horizon, particularly in Auckland. To date that supply has been met by an increase in the older population cohort, coupled with an increase in the penetration rate. A number of operators still report waiting lists.
However, there has been some speculation that we could be facing an oversupply a little further down the track. What would prompt an oversupply? And how will operators manage?
Jeremy Simpson, senior equity analyst and director of research at Forsyth Barr, says potentially there could be an oversupply in the near term if there is a housing market correction.
Operators will find various ways of managing this risk, like lowering their prices, for example. Independent operators will pause plans for new development and larger operators will build in stages for this very reason.
Ross Currie agrees.
“When the property cycle turns, as it inevitably will, operators have the ability to slow new unit development so that supply does not outstrip demand. Whether or not that happens remains to be seen.”
Currie believes the older villages will be the ones to suffer.
“Should supply exceed demand, I think that vacancies will occur in older villages/units that have not been upgraded to meet the expectations and demands of potential residents, whereas newer villages that offer a range of floor plan choices, community facilities and a continuum of care are more likely to be able to sell available units.”
Cam Ansell, managing director of Ansell Strategic, agrees that operators need to pay attention to the quality of their units.
“People are going to want the best quality unit they can find close to where they live.”
JLL says operators should have a thorough understanding of the supply and demand equation and should, as a precaution, be factoring in a potentially longer sell-down period and what impact that could have on their bottom line.
“Due to strong demand for retirement village units, any slight potential for oversupply would be short term and limited to spots/suburbs as opposed to the whole market. Not a significant impact overall; however, operators do need to be aware of this.”
Reuban Dalzell agrees there is minimal risk in this area.
“All operators I deal with are very experienced and perform detailed due diligence in their locations to ensure demand matches supply. I am currently seeing record levels of village sales in Auckland, indicating no oversupply,” he says.
Acronym overload – are LTOs, ORAs and DMFs still working for the market?
The increasing penetration rates would indicate that the licence to occupy (LTO) model with its deferred management fee (DMF) system is gaining acceptance. Those who move into a retirement village recognise that they are buying a package of benefits and a lifestyle rather than entering into a real estate transaction. The transparency and consumer protection provided by the relevant legislation have also helped to promote trust in the model.
JLL has analysed alternative options and liaised with government officials about these models. They concluded that alternative models also have their shortcomings and that the DMF model is a sound model for both residents and operators.
However, in an effort to remain competitive, operators are already making slight variations to their LTO agreements – such as capping the DMF, freezing the level of weekly fees, or even stopping them altogether. Many have scrapped the capital loss clause and one has even introduced a share of capital gains arrangement.
John Collyns, executive director of the Retirement Villages Association (RVA) says he expects these agreements will continue to evolve.
In the 2015 ANZ Annual Survey of RVA members, around 66 per cent of respondents saw no pressure on the ORA model. However, a significant 20 per cent believed a freehold model may emerge in the next seven years, and 25 per cent of members expected to see companies willing to start sharing capital gains in the future.
Ross Currie believes the baby boomers are likely to push the boundaries of the standard model.
“When the baby boomer cohort is ready to enter the retirement village, I think they will be a lot more demanding and will want to negotiate the terms of their occupancy. The financial component may be part, but not all of that negotiation. In general, baby boomers are the wealthiest generation ever; they know what they want and are prepared to pay for it. Operators need to prepare to meet their needs.”
Dalzell agrees. “Operators are always looking to differentiate themselves in some way and variations to the ORA terms are an option,” he says.
Cam Ansell agrees that some flexibility around the model is likely to be necessary as future generations enter retirement villages. He urges operators “not to get too hung up on the DMF model”.
Failing to meet future needs and demands
Ansell believes the biggest threat facing operators is failing to provide the future market with what it is seeking.
“I think the way we calculate demand is flawed. At present we look at the percentage of older people residing in retirement villages and project it out. The next generations are not all going to want to live in villages that look like Legoland. The baby boomers created consumer choice, so they will want a different offering, not what the market is dictating to them.”
Currie agrees, and says that baby boomers will be more demanding than current residents.
“Operators need to remain open-minded and adapt their facilities (including the physical real estate) and operating model to give baby boomers what they want or risk being left behind.
“What these needs are remains unclear at this stage, but they could include village design, integration into the community, what community facilities are provided, and demand for a user pays methodology and an ageing in place model that allows them to remain ‘in place’ rather than having to move within the village to obtain care.”
Ansell believes operators need to focus less on what they have to offer people and more on what is motivating people to seek retirement village living.
“Operators should learn not to rely on pull factors and instead need to concentrate on push factors.”
Downsizing is one such push factor; however, it is the need for care services that he believes provides the greatest impetus for people to move into a retirement village.
Jeremy Simpson says the increasing acuity levels and age of people entering retirement villages is an indication that people’s decisions are driven largely by their needs.
“But operators do need to account for changing tastes and preferences and like any business, continue to evolve and innovate.”
Bad publicity and government intervention
In addition to these potential threats, JLL experts believe negative public relations could be damaging to the retirement village industry.
Dalzell agrees, citing loss of reputation and decreasing consumer confidence as potential areas of concern for the sector.
“Reputation and brand development has been a key focus for operators to differentiate themselves from other operators and give confidence to intending residents. The industry has worked hard to raise the profile of village life and protracted negative publicity would be harmful.”
JLL also said government policy could potentially have an impact.
Currie agrees. “I think the industry is doing a good job of self-regulation. It needs to maintain discipline and fair-mindedness between operators and residents or risk government intervention.”
The importance of care provision
JLL believes aged care provision is good for retirement village business as it increases the demand for units in the village and provides an annual cash flow. This message has clearly hit home for the industry, with 80 per cent of new villages within the development pipeline now incorporating plans for aged care.
“Providing aged care makes the business more defensive,” agrees Forsyth Barr’s Jeremy Simpson.
Interestingly, Forsyth Barr’s August 2015 Golden Days report discusses an expected shortfall of quality aged care beds over the medium to longer term in the Auckland area, which could benefit those villages providing care at the expense of lifestyle villages if an oversupply situation emerges.
Currie thinks aged care should be profitable in its own right, accepting that the financial model and returns are different when compared with a retirement village that doesn’t offer care.
“What on-site care may provide is ongoing ORA sales/resales and higher village occupancy enhancing village returns, compared with having no care offering.
“The regular cashflow generated from profits of the care businesses is also beneficial to the business and can offset resale cashflow that can be seasonal in nature,” says Dalzell.
“Continuum of care has emerged as very important to village businesses,” continues Dalzell.
“Villages are attracting an older age group with more acute needs and the ability to deliver greater care services is becoming more important.
Like Dalzell, Currie believes strongly in the importance of providing a continuum of care.
“When potential residents are looking at retirement villages they are looking for the ability to age in place rather than needing to move again to obtain rest home and hospital care,” says Currie.
He believes operators that offer care on site have a competitive advantage over pure “play” retirement village operators, although the latter can address this by entering into alliances with aged care providers located nearby.
Care provision follows a continuum right through to acute hospital-level care and specialist dementia care. However, earlier care needs can often be addressed in the home through home-based support services.
John Collyns feels strongly about the need to better incorporate home-based support into retirement villages. He voices a familiar frustration: the inconsistent approach of district health boards (DHBs).
“DHBs allow iwi providers to provide home-based care – why not retirement villages?” he says.
Cam Ansell agrees. He says village operators are best positioned to provide 24/7 care on site, yet this is stifled by the DHBs being restricted to a certain number of service provider contracts.
While the in-between travel time legislation, which recently passed its third reading, is good news for carers who will now be fairly remunerated for their travel time between clients, it will essentially have a detrimental impact on village residents requiring home-based support. Ansell believes the time taken to travel to the resident could be better spent by getting physical care from people on site poised to deliver it.
“I think that future residents will want to remain in their existing homes in the village rather than moving from a villa, to an apartment, to a serviced apartment and then into care,” says Currie.
Industry experts don’t expect there to be high demand for intergenerational models, whereby older people live together in a community with younger generations, sharing facilities.
Ansell says he can’t see it happening. He gives the example of a New Zealand operator who built a range of housing, including expensive units aimed at wealthier people, rental units aimed at the less wealthy and a nursing home – only to find that the wealthy residents didn’t want to mix with the poor or the disabled.
“If we can’t see social cohesion in a New Zealand retirement village then what chance have we for an intergenerational village?”
Ross Currie agrees we’d need to see a significant cultural change before we saw intergenerational villages emerge.
“In general Kiwis in their old age don’t want to live with their kids and the kids don’t want their parents living with them. The kids would rather pay for their parents to have quality care if the parents can’t afford to pay for themselves. This is different from other cultures where it is normal to care for the older generation.
That said, Currie believes operators should be future-focused in their thinking, and should not discount the possibility of facilities being used by younger generations.
“New retirement village developments should contemplate a potentially declining population from around 2060 and include alternate uses in their design, primarily the facility being designed to also accommodate families and working-age couples. That would allow for the family generations to live in close proximity to each other so that the younger generation can look out for their parents without being under the same roof.”
Rental retirement units
Rental units are another possible direction for the retirement village industry. Some operators have explored rentals; however, this is typically for short-term rentals to maintain occupancy until future residents sell their existing property. As an alternative to the ORA, experts believe the rental approach is unlikely to take off, particularly for the corporate sector.
“Rental units are popular but diminishing in number,” says Dalzell. “The difficulty is making them work economically for operators, versus the ORA model. I think the future for rental units in New Zealand currently remains the domain of the not-for-profit sector, which may be less motivated by the returns to shareholders.”
JLL believes the rental approach may be adopted for locations at the lower end of the market; however, they would not expect to see it taking off in affluent suburbs or higher value areas.
“Due to the less certain nature of renting versus owning and unjustifiable rental levels, which would be required, we do not see the rental model as making a wide appearance.
“Rental units would require a new funding model, both debt and equity. Without modelling it the financial incentive to provide rental units rather than ORAs appears limited,” says Currie.
While retirement village operators need to be mindful of the risks and threats to their businesses, it seems clear there is an abundance of opportunities. With a strong springboard underfoot and relative freedom from stifling government policy and intervention, the industry has the opportunity for great innovation as it looks forward to whatever the future has in store.
Ross Currie is an employee of ASB Bank Ltd. Where his views and opinions are cited above, they may not necessarily be the views of ASB Bank Ltd.