PORTFOLIO POINT: With an ageing population, investing in retirement property sounds good. But do the returns stack up?
Is there money to be made in investing in retirement accommodation? Some seem to think so.
Last week the Property Council of Australia announced it had merged with the Retirement Village Association. Property Council chief operating officer Ken Morrison positioned the merger as a win for all.
“The industry needs to be recognised as a critical housing and care solution for older Australians whose importance will grow dramatically,” Mr Morrison said. “This merger gives the industry the political muscle it has been looking for and more benefits for the whole sector, including residents of villages.”
The news came quickly on the heels of fresh data from the Australian Bureau of Statistics that life expectancy is growing at a remarkable rate. A boy born in 2011 can expect to live 79.7 years and a girl 84.2 years. In 2001, 10 years earlier, life expectancy was 77 years for boys and 82.4 years for girls. So in just 10 years life expectancy has jumped 2.7 years for boys and 1.8 years for girls.
As importantly, life expectancy has improved across ages. To take one age group as an illustration, as of 2011, a 50-year-old male can now expect to live another 32 years, which is 2.1 years more than his 2001 counterpart. A 50-year female in 2011 can expect to live to 85.6 years, 1.5 years longer than her 2001 counterpart.
These developments demonstrate that many retirees are living lives that are youthful, independent and vigorous, and that the property industry is gearing up to address the opportunities of an ageing society.
As our retirements become longer, a trend already underway and likely to deepen is downsizing by retirees from their current home to something smaller and/or into tailored accommodation – often known as retirement villages – where they remain autonomous, but enjoy the community spirit of living close to others at the same stage of life.
I sense that people are becoming more strategic about planning for the third age. They want to be in control of the process of downsizing, rather than let an accident, illness or loss of partner control their destiny. Further, they recognise that downsizing will release funds that, if correctly invested, can help support a more comfortable retirement.
Is the retirement sector a good investment?
So with what seems like an inevitable growth phase in coming years, is the retirement sector a worthy investment option for those still in the asset accumulation phase?
There are a small number of retirement rental villages in Australia where one can buy a unit and lease it to retirees, whilst paying a management fee to the village operator.
Investors are often attracted to this proposition by low property prices – sometimes as low as $150,000 for a one-bedroom unit – and the high rental yields they tend to offer. Plus there is a dedicated rental village operator who will manage everything.
Unfortunately, whilst these points seem like good news on the surface, they reflect the features of a poor investment.
Entry prices are generally low as rental village accommodation is usually located in outer suburbs, and the units are small – often below 40 m2, which incidentally means banks are wary of lending against them. Those that are located in the inner suburbs are often larger but overpriced for what they are. Typically two-bedroom apartments, they are often priced at $700,000 and above, and the resale value doesn’t hold its own from an investment perspective.
Yields of close to 10% are not uncommon, but this is a function of very low values rather than good dollar rents. When buying into this sort of accommodation, unit owners sign over control to the property operator and have little say in what is done to the property or the management fees. Finally, when it comes to resale, your potential buyers are restricted to those who are willing to lease the property out as retirement rental accommodation. So effectively, as an investor, you can only sell to another investor, thereby cutting out up to 80% of future buyers who are looking for a home.
With so little going for the business model, it is unsurprising that rental villages are a dying breed as far as an investor is concerned, and you’re very unlikely to be marketed such an offer, unless you go looking for it. Don’t.
The more dominant retirement model in Australia involves residents purchasing property rights – be it freehold or leasehold – from a village owner, and then paying ongoing body corporate fees, plus what’s called a ‘deferred managed fee’ (DMF) when they leave the facility. Consequently, these properties are off-limits to property investors as you can’t buy the retirement property without living in it. But it is possible to invest in the developers and operators of such facilities.
In the short term, there are investment challenges for the DMF retirement sector. Currently the industry is being held back to a degree by a relatively flat residential market. For the vast majority of prospective residents, most of their wealth is tied up in their homes. This is a generation who didn’t have time to benefit from the introduction of compulsory super in the late 1980s. So they may need to sell their home to enter a village, and if it is taking longer to sell their home or they are getting less than they want, then they may delay or defer a decision.
Longer term – in light of changing demographics – the news may be better for the industry. We may see an undersupply of retirement villages given very few being built at the moment, which could boost returns.
Investors might consider buying the shares of companies like ING Community Living Group, FKP Property Group, Stockland or Lend Lease, each of whom have interests in the retirement home sector.
The DMF sector is not without its controversies. The idea of the DMF is to backload the cost of providing the service, avoiding the need for residents to find large sums of capital which might force them to sell the family home immediately. However, the retirement village industry has received a lot of criticism for the size of these DMFs, for alleged opaque fee structures, and for over-charging residents for services.
The industry challenges this criticism. Martin Skahill, an agent at Elders Real Estate Bendigo, a specialist in retirement units, emphasises that the safeguards he provides buyers go beyond the statutory 21-day cooling off period. “I say to prospective clients, ‘I won’t let you buy a property until you are certain.’ I encourage them to bring their family to meet me so I can explain how deferred management fees and body corporate fees work. Contrary to some reports, it’s not a hard sell. There’s no angst, no rushing people into a purchase.”
Clearly it is incumbent on prospective residents and investors to do their homework and obtain legal and financial advice. But beyond preparing for our own retirement accommodation needs, there is a paucity of viable investment opportunities related to the retirement accommodation industry, and most of those that do exist don’t stack up.
Moreover, the uneven track record of past investments and challenges faced by the industry to adjust to an ever-changing and tightening regulatory landscape means success is not guaranteed. And whilst homebuyers may view this option as very appropriate and desirable considering their stage of life, it’s crucial that they understand, assess and budget for the initial and ongoing costs associated with this lifestyle choice and consider the implications from an estate planning perspective.
- Should I invest further out in Melbourne?
- Is Redfern investment grade?
- Do solar panels add value to property?
- Will the shelving of Olympic Dam affect Adelaide property?
Should I invest further out in Melbourne?
As the inner suburbs of Melbourne become increasing unaffordable for first home buyers, many will look slightly further out. With this in mind, I’m looking at investing in a two-bedroom house in Preston. Good idea?
There are pros and cons to this approach, but it’s not without merit. On the plus side, Preston is indeed attracting more attention from those priced out of closer-in suburbs such as Thornbury and Brunswick, so there is a structural change in demand that should be sustainable in the long term.
However, it is still a trend in the making and Preston remains a bit speculative. To minimise your risk, focus on the southern parts just north of Bell Street. There are some fantastic streets off Bell Street and High Street that offer the right ingredients and good public transport links to the CBD via tram and train. Further, if you’re investing in Preston or other investment grade cusp suburbs, it’s especially critical that you are uncompromising in choosing an asset. The style, condition, architectural consistency, and floor plan have to be spot on.
However, I remain wary of encouraging investment further out because the inner suburbs are considered ‘unaffordable.’ The reality is that the inner suburbs are always unaffordable! But they are consistent, proven performers if the asset selection is right. Rather than buying further out, investors are usually better off making friends with unaffordability and accepting that their budget may only buy a quality two-bedroom apartment rather than a two bedroom house or a quality one-bed apartment rather than a two-bedroom apartment. Their budget may not buy as much accommodation but it will still buy a quality asset with a track record and a propensity for capital growth.
Is Redfern investment grade?
I’m thinking of investing in Redfern, NSW. It’s gone through substantial gentrification over recent decades. But would you consider it investment grade?
Redfern is absolutely investment grade territory, as long as you identify and invest in the right parts of the suburb where gentrification has been long established. There are some great enclaves of consistent Victorian terraced houses in Redfern. At only 3 kilometres from the CBD, it is walking distance to the city centre and also to Sydney University.
Do solar panels add value to property?
There has been a remarkable surge in uptake in solar panels in Australia in recent years, and it’s only going to grow more in response to high electricity bills. Will solar panels add value to a property and allow me to charge a higher rent?
I’ve been monitoring the solar panel uptake trend for several years and I regularly weigh up whether the presence of solar panels or other energy saving measures has become a positive criteria for the selection of an investment asset.
I’m afraid to say that solar panels and other green measures are still not a first order issue for investors. It remains the old reliables – location, style, position, floor plans and price – that drive outcomes.
To be sure, having solar panels on a property is a positive, but the uplift in rent and property value that they might deliver is likely to be heavily outweighed by the costs of installation and maintenance. Further, I suggest panels lag other energy-related issues such as property aspect, thermal properties and overall energy efficiency.
From a supply perspective, the presence of solar panels is not yet pervasive enough for there to a market for solar panel houses. We’ve yet to reach a critical mass.
Will my position change one day? Possibly, but this is an incredibly complex area to make predictions about given the interplay between government policy and regulation, electricity prices, the changing nature of feed-in tariffs, and property demand and supply. For instance, solar energy technology is improving all the time and becoming ever cheaper and governments may in the future make it mandatory for landlords to provide an energy rating for their property. Whilst these trends would boost solar panel take-up and support your contention in the short term, we could quickly reach a situation where solar panels became ubiquitous and any price or rent premium for having them would be eroded to nothing.
Will the shelving of Olympic Dam affect Adelaide property?
What if any ramifications do you think the shelving of the BHP Olympic Dam expansion will have on the Adelaide property market?
I wasn’t getting too excited about the impact of the expansion of the Olympic Dam on Adelaide’s property market when it looked like a certainty, so I’m not that concerned given it isn’t happening for the foreseeable future.
Sure, the $30 billion expansion and subsequent increased mining royalties would have been a boon to the South Australian economy, but it would have taken many years and possibly decades for the impact to have been felt so, rightly in my view, participants in the property market had not factored these potential benefits into property prices so there is nothing to unwind.
But this episode is another example of avoiding speculating on plans that may change. There's many a slip twixt the cup and the lip! Instead, in Adelaide, focus on investment grade properties in established areas within 3-4 kilometres of the CBD.
Monique Sasson Wakelin is a co-founder and director of Wakelin Property Advisory, an independent firm specialising in acquiring residential property for investors. Monique can be found on Twitter: @WakelinProperty.
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