Current media focus is upon Retirement Villages.

Here in one place are 4 of the best articles

The articles below in my view are a solid overview of the issues.

Retirement village prices are up, but that hasn’t dented demand

Miriam Bell  Jun 25 2023

Retirement village prices have gone up while house prices have toppled in the market downturn, and that may be having an effect on the nest eggs of potential residents.

Data from Trade Me showed the national average asking price for retirement village property was $699,900 in May, which was up 34% from $521,350 in the same month last year.

At the same time, the average asking price for residential properties on Trade Me was down 10.5% annually to $850,150 in May.

But the occupancy right agreement (ORA) model used by most villages makes it difficult to accurately measure the market, according to CoreLogic.

An ORA is what people buy when they move into a village, and it is the right to occupy a particular unit in the village. There are weekly fees for amenities, and other costs, such as rates, insurance, and maintenance.

Nikko Asset Management retirement village specialist Tim O’Loan says villages have put through some modest price increases throughout the housing market downturn.

But when the market was booming operators put through similar price changes, as opposed to big increases in line with the broader market, he says.

“In 2020 and 2021, house prices rose about 43%, but you didn’t see anything like that in village prices. Their increases were far more conservative.

“That is part of the operators’ strategy because they don’t want to see volatility in their pricing. It is not good for potential customers, and investors in the sector don’t like it.”

Operators will use the local median house price to inform their pricing, but there will be a gap between the price of a village unit in a certain area and the median house price for the same area, he says.

JLL head of research Gavin Read says pricing is difficult to assess, but the reduction in house prices was likely to impact on the size of a potential village resident’s nest egg.

“If house prices in an area have come back $200,000, but the price of the village someone wants to move into has gone up a bit, some of the liquidity that will fund their lives in the village has gone.

“It affects people differently though. If you have a $4 million house, and want a unit which costs $1.2m, it won’t have much impact if your house has gone down in value slightly. But it might if you are in a $1.2m house.”

The question became whether that had an impact on the person’s plans to go into a village, and whether they had enough left to live on, he said.

“But the typical village resident does tend to have a bit of wealth over and above what they get from their house sale, and are not entirely dependent on the sale for their nest egg.”

Demand for village property is still booming.

The number of properties listed on Trade Me in May was up 11% year-on-year, while demand was up 16%.

Read said about 14% of the population aged 75-plus was in retirement villages in 2021, and the ageing population meant demand will continue to grow.

In 2021, there were an estimated 48,736 residents, but the 75-plus population forecasts indicated there will be about 80,642 residents by 2033.

Liz Koh, a financial planner who specialises in retirement planning, says villages usually have long waiting lists because of the high demand, and it keeps a floor under their prices.

To get into a village it is necessary to be cashed up, and to meet the payment deadline in a falling market some people may have to accept a softer price for their family home than they would like, she says.

“That can cause difficulties for some people, especially if most of their wealth is tied up in their home, and it diminishes their nest egg.

I “People need to be aware of it, although they can’t do much about it. It is possible to shop around different locations, as selling somewhere like Auckland and moving somewhere smaller can help.”

But for most people who want to move into a village, the decision is not about money, it is about lifestyle, she says.

“People are interested in companionship and a social network, the facilities, safety and security, and also a pathway for them to move into assisted living or aged care without much difficult

Some people’s nest eggs may be affected by the fall in house prices, financial planner Liz Koh says.

“What is key is for people to ensure they have enough in their retirement funds to pay for their village levies, and their needs, and to do the thing A narrower price differential in the current market should not stop someone who has the funds from moving into a village if that is what they want to do, she says.

But many people do not have the financial means to buy into a village, and it is a particular problem for people who do not own a home.

Research by the Retirement Commissioner last year found it was getting harder for people heading into retirement, and highlighted the impact of housing affordability on retirement.

It also found the balance of homeownership is expected to shift to 60% homeowners and 40% paying rent, and by 2048 that 40% will equate to close to 600,000 people.

Retirement Villages Association executive director John Collyns says the industry is acutely aware of the growth in demand, and of the rising number of elderly retiring without their own home.

“Operators are building as fast as possible to meet demand, but the industry also needs to think about how to cater to coming generations with less capital than previous generations, and with more renters and fewer homeowners.”

About 60 operators out of about 400 provide rental units in their villages, and there are about 600 rental units around the country, he says.

“Some operators are putting more in. The Wellington Masonic Village Trust is building a brand-new village in Wainuiomata, and 10% of the units will be rentals, for example.

“The rental units are popular, and if there were more of them they would be easily filled several times over.”

Rental offerings in villages are likely to increase as ANZ’s regular survey of villages indicates the number of operators amenable to it has gone up, although it is still a minority, he says.

“For those who have sold a home, but have a shortfall in funds, the legislation does allow for operators to offer a level of flexibility to residents.

“An example could be someone with $400,000 might want to move into a $600,000 unit, and an operator could arrange for a higher deferred management fee at the end to compensate for the lower capital sum they buy in with.”

The traditional village model is not a freehold ownership model, but it is one that can evolve and future generations of residents will want more flexibility, Collyns says.

Retirement village operators in recovery after a ‘pretty tough’ pandemic

Tina Morrison Jul 07 2023

ANALYSIS: A disrupted building market, labour shortages and a global pandemic have roiled retirement village operators over the last three years but investors are optimistic they are now starting to come out the other side.

Compared with countries like the United Kingdom, where thousands of aged care residents died during the pandemic due to lax procedures, New Zealand’s listed retirement village companies looked after their residents well during what has arguably been the most challenging period in their history.

But they haven’t come through unscathed.

The biggest impact has been felt by Ryman Healthcare, the largest listed retirement village operator, which was forced to tap shareholders for $902 million of equity to strengthen its balance sheet and pay down debt in February this year – the first time it has had to go cap in hand to shareholders since listing in 1999.

The company’s stress can be seen in its share price. Prior to the pandemic at the start of 2020, Ryman shares were trading at $16.99. By the start of this year, they had slumped to $5.64.

So what has put them under pressure?

A cashflow squeeze

Ryman had increasingly been developing large-scale, high-density vertical buildings. In the long term, that produces good returns but it takes time for those returns to come through. It takes a lot of money upfront to develop such big commercial buildings and unlike smaller independent villas, the whole complex has to be developed in one hit which ties up money for a long time before any returns come through. During Covid, the construction market was disrupted by lockdowns, sickness, supply bottlenecks and escalating costs which delayed big developments like Ryman’s and put pressure on the company’s cashflow. Rising interest rates coming out of the pandemic added additional pressure to its elevated debt levels.

As well as raising money to strengthen its balance sheet and pay down debt, Ryman has slowed and paused construction at some sites and changed its strategy towards lower-density developments to give it more flexibility and lower its risk.

The cost of care

The cost of providing care to residents during Covid increased as operators took on more staff to cover sickness, invested in personal protective equipment (PPE), and bolstered pay for caregivers and nurses to match public sector pay rates at a time when they were constrained from bringing in overseas workers to supplement the local workforce.

“The economic impact for the retirement aged care sector was pretty tough, with massive costs incurred,” says Shane Solly, a portfolio manager at Harbour Asset Management.

He notes the higher costs associated with protecting residents has been borne predominantly by the businesses, rather than the Government.

Solly says villages are dialling back the size of new care facilities as a lack of government support for the service meant it was not profitable. While new developments will still have enough care beds available for village residents, there is likely to be less capacity to take people from outside the villages.

“It just comes back to the economics of running care, which has just become very challenging,” he says. “We’ve seen most of the listed operators really reduce the proportion of care. The economics don’t support the degree of build rate that was occurring in care.”

Solly says investors want to see villages provide high quality care for residents, which means they may have to shrink the size of facilities to provide a better service.

The volatile housing market

Residents moving into a retirement village are generally selling the family home and using that cash to fund their move to a village. A volatile housing market can play havoc with those plans.

The rapid slowdown in the housing market has reduced the ability of people to sell their homes and move to a village. Selling a house is stressful at the best of times and extremely challenging if you haven’t done it for a while. People contemplating a move have to be confident that they can sell their house in a reasonable amount of time and it’s not going to be languishing on the market for an extended period.

Signs of a pickup

Shares of the big retirement village stocks have generally outperformed the 4.4% gain in the benchmark S&P/NZX 50 Index this year. Ryman is up 33%, Summerset is up 11%, and Arvida is up 11%.

Oceania Healthcare is a laggard, having slipped 0.9%. In a note following the company’s annual profit result in May, Craigs Investment Partners noted that its new villages had been slow to sell with the level of unsold inventory almost doubling over the second half, resulting in higher debt. Earnings from the care part of its business fell due to cost pressures from nursing wages. But it said the company was taking corrective action which should see debt reduce and earnings improve.

The smallest listed operator, Radius Residential Care, is another outlier with a 28% decline in share price this year. The company, which is skewed towards aged care facilities, is coming under pressure from its bank after a debt-funded expansion.

Solly says Harbour Asset Management has increased its investment in the sector, and holds shares in the four largest operators.

He says Harbour favours businesses with good structural tailwinds and thinks integrated villages are well positioned for the sharp increase in the ageing population.

The number of people aged 75 or over, which is the key target population for retirement villages, is estimated to climb to 832,810 by 2048, from 345,960 in 2021, according to the 2022 Retirement Villages and Aged Care Report published by commercial real estate firm JLL.

The report suggests demand will continue to outstrip supply.

“Despite a decade of significant growth, New Zealand’s thriving retirement sector is still struggling to keep pace with demand from an ageing population,” the report said.

How do operators make money on retirement villages?

Janine Starks Jun 24 2023

The average tenure for a retirement village is seven years – and that statistic is important

Janine Starks is the author of www.moneytips.nz and a financial commentator with expertise in banking, personal finance and funds management.

OPINION: Retirement villages have shaken off their reputation as homes for the wibbly and wobbly.

Unit prices are often over $1 million in some of the swankier villages where residents have access to a pool, cinema, cafe and community rooms for drinks and social gatherings.

But we can’t forget reality.

Even for the active, these are delicate end-of-life housing decisions. And there’s one very real statistic which doesn’t appear in village marketing material: the average tenure is seven years.

I’m not talking about those in a care suite – their average is two years. These statistics are important.

Back in 2017, one share market analyst referred to the pricing model of the big-six operators as “the beautiful model”. He was basking in shareholder heaven.

Operators often speak of “acceptance” and “good understanding” of their product to investors and when lobbying politicians.

But facts and fairness are not the same thing. Just because a lawyer can explain the features, doesn’t mean a resident has choice or can weigh up value for money or suitability.

So how much money are they making?

Operators have performed a basic restructuring of a housing transaction.

First, the purchase of the unit (via a licence fee) and second, the deferred payment for village facilities. The two parts have been swept into one legal wrapper. The concept is practical.

My assessment of a new $750,000 unit is operators are earning revenue and benefits over the seven-year average tenure of $1.2m ($173,000 annually). They’ve earned this without paying for the unit.

These are super-profits. Let’s be clear, profit is a good thing. Making expensive choices is also fine, but this sort of money is stratospheric and can only occur when the economic norms which prevail in a competitive market with equal power have failed.

What we have is mispricing.

Let’s start at the beginning:

1. Development margin 25%

Land, construction, infrastructure costs, head-office costs and interest on borrowed money is capitalised into the price of a unit. In the 2022 accounts for Summerset, their profit margin was 29.7%. For Arvida in 2023 it was 20%.

2. $150 weekly fee

This pays for things like maintenance, gardening, alarm bell and buildings insurance. Over seven years, that’s $54,600.

Items one and two involve no restructuring and appear commercial. The house might be in a different legal wrapper, but in substance it replicates homeownership. The restructuring occurs below.

3. 25% deferred management fee

The cost of using village facilities is deferred until death or exit. At $187,500 on a $750,000 unit, it goes without saying profit margin and the time value of money is added in.

That’s teeth-grittingly expensive, but what rubs is the fee accrues in full after only four years, not the seven-year average lifespan. In addition, every resident pays the same amount, regardless of living in the village four years or 14 years.

Some families are making a huge transfer of wealth for the benefit of other families. Housing is not an insurance product and there’s no social justification for not paying for use via an annual fee.

This isn’t a random risk. Those who move in at an older age or with health conditions are facing a certain penalty. Lawyers can disclose this but can’t offer a solution. Their client capitulates due to need.

Operators are not made to include warnings or alter their model to give all residents a fair financial outcome. There’s more profit with higher churn and no preventative legislation.

4. Capital gains 71%

The legal wrapper keeps ownership with operators. Against economic norms and substance, over $500,000 of gains are banked in the financial accounts when the next resident purchases a licence.

It’s important to remember gains and losses are not a zero-sum game. Due to probability, their pricing in a structure is positive when a mathematical model is used.

For operators to keep a small slice of gains, they need to agree to take all the losses. Some argue repeating these gains is unlikely. That’s untrue over the long term and views on the payoff size are not relevant to fair pricing.

Others argue their residents don’t want property market exposure. That’s absurd misinformation when the risk sits with family and intergenerational wealth transfer is crucial, given housing affordability issues.

5. Interest-free loan 4.24%

Residents pay for a unit without owning it. Operators record this in their annual accounts as an interest-free loan.

If economic norms prevailed the loan would be fair, as consideration for the right to occupy. But the loan and gains have not been split between the parties, nor valued and restructured.

Operators simply take both. They’re able to fund new-build units with no borrowing cost, while retaining all the upside in the asset the resident purchased. It defies financial gravity and this benefit has been put in the table to make that point.

The product is highly unsuitable on a financial level for many residents, in a health- and age-driven market which is not random.

Keeping capital gains was never essential to this business model, due to their unpredictability. I believe they were a bi-product of the structuring that fell neatly into operators’ laps. They’re now entrenched in a belief their form of ownership overrides the substance of the agreement.

No-one argued – certainly not shareholders or analysts. Residents caved in, based on need and resignation that things would never change.

A full report ‘Analysis of Retirement Village Costs’ can be viewed at www.moneytips.nz. Readers should always seek specific independent financial advice appropriate to their own circumstances.

Retirement village life may be happy, but it’s not necessarily fair

Janet Wilson 05  Apr 22 2023

Navigating the financial costs of retirement village life can diminish the happiness many residents report.

Janet Wilson is a freelance journalist who has also worked in communications, including with the National Party in 2020. She is a regular contributor to Stuff.

OPINION: Even the most cursory of glances at this week’s letters to the editor will attest to the fact that retirement village life is the most polarising of issues.

One writer acknowledged the “unfavourable, indeed unfair financial aspects of [the occupancy] rights agreement we signed, as our children may inherit less money”.

“However, we are spending our own money, accumulated by hard work and fiscal prudence for the ‘rainy day’,” they wrote, before going on to declare that life is better now, and they are happy.

Another letter described the costs in retirement villages as “modest”, but worried about increased property revaluations in their city, a capital gain which their children and grandchildren wouldn’t get.

Yet another commented on the full-page ad the Retirement Villages Association placed in several newspapers last weekend, claiming that nearly 90% of village residents were review either very satisfied or satisfied with their experiences of living in a retirement village. 

Graham Wilkinson, President of the Retirement Villages Association RVA, addresses MPs about reforms proposed for the sector. Also in shot is John Collyns, the RVA executive director.

Noting that there were 410 villages throughout New Zealand to choose from, the writer pointed out that the RVA had collected support from 60 of them, suggesting that, “perhaps then the result is not so great after all”.

The advertisement was itself a response to an earlier article I wrote about the inequities and lack of consumer rights in the retirement villages business.

I have no doubt that the RVA’s statement that nearly 90% of village residents were either very satisfied or satisfied with their experiences of living in a retirement village is true.

As Retirement Commissioner Jane Wrightson told me, of the three phases of village life – moving in, living in, and moving on – it’s the middle phase where the most serenity occurs.

But while many residents are happy with village life, they’re unhappy “with the fairness of the terms or the consumer protection afforded to them”, Retirement Village Residents’ Association president Brian Peat acknowledged this week.

.The operators are facing a changing regulatory framework, something which Consumer NZ, the Retirement Commissioner, Grey Power, Aged Concern, the NZ Law Society and 10,000 retirement village residents have all demanded.

In being resistant to change, the RVA has failed at policing its own. Three years ago, the association promised to collate the occupancy rights agreements for each village to make comparisons easier, what it called key term summaries.

This would compile each village’s costs and cover everything from weekly fees to repairs and maintenance, and deferred management fees (the portion of a resident’s initial capital outlay which the operator keeps in order to cover the costs of occupancy).

That promise proved to be empty. Some villages have refused to supply the information, and to date the RVA hasn’t audited its members.

Which leaves residents none the wiser, forced to negotiate labyrinthine occupancy rights agreements and fretting over claims made in disclosure statements that operators are not contractually obliged to follow, but which lure prospective buyers in.

This ultimately forces grieving families to pay for lawyers’ fees and unit refurbishment once their loved one leaves, not to mention being forced to replace whiteware they never owned.

Retirement village life can be sweet, but Janet Wilson argues that the problems lie in the fine print. (File photo)

So, what would change in the retirement village sector look like? The Retirement Commissioner’s 2020 white paper recommendations give us some clues.

Jane Wrightson advocated for simpler, more standardised occupancy rights agreements, and a dispute resolution system that would replace the present convoluted complaints process, and appoint an ombudsman.

The operators pushed back strongly against both proposals last August at their annual conference, claiming that standardisation would prevent villages from differentiating themselves in the market.

MetLife care chief executive Earl Gasparich described appointing an ombudsman as “the last thing we need” before going on to describe Wrightson as “an interesting individual” and someone “who does have an agenda that she wants to happen”.

In one sense Gasparich is right, but in another he’s wrong. After all, the Retirement Commissioner’s principal job description is to advocate for all fortunate enough to reach their senior years.

It’s easy to forget that while operators continue to shrug off calls for any regulation, at the top end of the market retirement villages are big businesses.

Six retirement village companies are listed on the NZX mainboard, which means that their directors’ fiduciary obligations lie with their shareholders.

And for residents that means that, barring being taken out of their unit in a box, right now the occupancy rights agreements whittle away any financial security they have, and with it the flexibility to move elsewhere if their circumstances change.

As Brian Peat told residents last week, the system was penned in the interests of the companies running the villages, not the rights and interests of the people living in them.

“Many of us like the village life we have chosen,” he said. “We just want to see it fairer for all – now and in the future.”