Capital gains are a 'significant chunk' of retirement village profits, analysts say

Wednesday, 17 March 2021

Analysts say resale gains on units are a significant part of the earnings of retirement village operators.

Resale gains on units are a “significant chunk” of retirement village profits, financial analysts say, as debate heats up on whether residents should share in those.

The Retirement Village Residents Association is calling on retirement village owners to share some of these resale gains with residents or their estates when residents pass away or move into care.

Residents of retirement villages have made hundreds of submissions to the Retirement Commission backing its recommendation of a major revamp of retirement village legislation where one of the issues for debate is whether residents should share some of the resale gains.

Residents pay a cash lump sum to buy a licence to occupy a unit via an occupation rights agreement (ORA) and when they leave or pass away they or their estates get between 70 per cent to 80 per cent of that money back because village owners take 20 per cent to30 per cent in “deferred management fees” for costs in maintaining the unit.

Gains from reselling occupation rights at retirement villages owned by Ryman Healthcare and Summerset Group are more than 20 per cent their accounts show.

* Proposal to make retirement villages share capital gains with residents

Then the occupation right is resold to a new resident, usually at a higher price, and the village operator makes a gain on the resale.

The accounts of Ryman Healthcare, the biggest retirement village operator, and of Summerset, a big operator also, show that resale gains are more than 20 per cent.

Craigs Investment Partners analyst Roy Davidson said it was difficult to work out from retirement village company disclosures what proportion of profits was coming from capital gains?

“But it would be a significant chunk,” Davidson said.

Retirement village operations were a much more profitable part of the retirement village companies’ earnings than aged care which many also offered alongside the village units.

Aged care which relied on government subsidies was not very profitable, but it attracted people to the villages because they knew they could move into the care section when needed.

Key parts of the earnings were the deferred management fees and resale gains of ORAs. Resale gains would change year by year depending on what the property market was doing, Davidson said.

Essentially the operators were taking on the risk of property prices going up or down, but they had been going up most of the time except for March last year when Covid-19 struck.

It would be a fundamental change to the village owners’ business model if they had to share resale gains, Davidson said.

Forsyth Barr aged care analyst Aaron Ibbotson said the resale gains were an important part of how the retirement village businesses were structured today.

Resale gains made up “a meaningful proportion of their profits or earnings”. It varied between the retirement villages, but it might be 25 per cent of earnings before interest, tax and depreciation costs.

“If you look at that number it could be something like say a quarter of ebitda or something like that,” Ibbotson said.

If the resale gains had to be shared with residents or their estates he expected village operators would look at other means to offset that, maybe by raising weekly fees.

And he expected occupational rights agreements would become more complicated and new provisions on who paid for maintenance and upkeep and other factors like selling costs would be added.

He said the resale gains were not strictly capital gains because it was not property being sold but a right to occupy a property. Residents did not own the units. They paid a lump sum to occupy them. The units remained owned by the retirement village companies.

The occupation rights model was a special structure. It was not property ownership nor property renting, but he considered it worked well for residents and better than systems in Australia and Europe where he had had more experience.

The return on investment for the retirement village operators was not particularly high, less than 10 per cent. It would be difficult to argue they were earning a return on their capital which was above the cost of the capital.