No room at the twilight inn

An acute shortage of retirement housing is likely to face ageing baby boomers unless a great deal more investment in the sector takes place.

Some 130,000 Australians will turn 75 this year, and the number will be higher next year. From here on in, it will be an ever-increasing trend.

It is around the age of 75 that when Australians start to consider moving to a retirement village. Often it is a decision forced by changed circumstances, making it no longer feasible to live independently at home.

But any shift is usually predicated on selling the family home. In recent years, with the residential market soft, many of those wanting to move have been denied the opportunity.

That is now changing. Residential markets, particularly in Queensland and NSW, have started to stir – as reflected in improving auction clearance rates in recent months. Consequently, the time taken to sell a house in a market like Perth has fallen – from an average seven months to around three or four months.

This is backed up by enquiries for retirement units. Take the example of Stockland, which has seen 100 per cent more enquiries than forecast during its current marketing campaign.

"We are not talking about big discounts. We are offering buyers a three-month, levy-free period which adds up to no more than $2,000," says David Pitman, Stockland's group executive for community living.

Industry players confirm that a big, pent-up demand for retirement living is emerging.

According to ABS statistics, 14 per cent of Australians today are over 65 years, and this figure will climb to 20 per cent by 2030.

Assuming that 5 per cent – against 10 per cent in the United States – of the over-65s plan to move into a retirement village, the shortfall in available accommodation will inevitably become bigger with each coming year.

Pitman believes Australia needs another 100,000 retirement units – more than 5,000 units to be built each year – over the next 17 years. Best estimates around suggest that currently 3,000 units are being built each year.

Australia's two largest listed operators, Stockland and Lend Lease, are building around 600 units a year between them.

It was not always this slow. The sector attracted big dollars when the likes of AMP Capital Investors, the Hague-based ING Group, Macquarie Group and the collapsed Babcock & Brown, jumped onto the retirement living bandwagon, fuelled by cheap debt and hubris pre-2007.

Collectively, they burned billions of dollars in investors’ equity and have since dumped their assets at fire-sales and moved on.

Lingering pain continues in the sector even after six years of value destruction. The Melbourne-based Becton, for which retirement a core business, has just gone into receivership, while the Queensland-based FKP Ltd is yet to sort out its heavy debt burden.

The sector is, nevertheless, slowly stabilising and re-establishing itself as a viable business.

Compared to shopping centres, says one shrewd Sydney fund manager, retirement is his investment of choice. Bricks-and-mortar shopping centres face a major challenge from online shopping - while Australia's demographic trend is irrefutable.

The fund manager’s belief in stocks like Ingenia Communities, now the only true play proxy for Australia's own silver tsunami, has been rewarded, with a 10-fold increase in the stock price (from 3 cents to 30 cents) of Ingenia. Ingenia’s owner, Simon Owen, who turned the heavily indebted ING Community Living Fund into the lowly-geared Ingenia, expects that trend to continue, with retirement based investments.

If the sector is going to grow 5000 units to per year, it will need to attract more institutional investors, who are put off by the current structure of deferred management fees, where at the time of departure – on average after a decade – the capital gain is shared between the operator and the resident (or his or her estate).

The proportion differs from operator to operator – and this is where the confusion arises. It is a legacy issue that the industry is attempting to tidy up.

As a business model, the sector only makes sense if it is a sizeable operation, front-loaded with development profits.

According to actuarial calculations, an operator requires a sizeable business to give him an annual turnover rate of 8-9 per cent (the higher the better). Profits from the sale of new units, together with deferred management fee payments and a share of capital gain from departing residents, provide the cash-flow and profitability for the operator.

Another issue holding the sector back is the means testing of retirees looking to buy into units. Derek McMillan, chairman of the Retirement Living Council, is lobbying the government to change means testing of those on a part pension by seeking exclusion of funds left over from the sale of the family home after paying for a retirement unit.

Usually, the elderly are left with cash of between $100,000 and $150,000. On average, the industry says the retirement units cost up 70 to 80 per cent of the value of the buyers' homes.

As things stand today, the government includes that money in the means test for pensions, and this could result in some people losing up to 60 or 70 per cent of their pension entitlement.

Australia’s growing need for retirement housing has been offset by improvements in medicine – people can stay in their homes for longer. But as the boomer population ages, the shortage of retirement units will become more acute.

Opening further paths for investment will become critical.

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