Derek McMillan rewrites the value proposition for older villages

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(Extract from full story in last Saturday’s SATURDAY, in your InBox at 6am).

Centennial Living CEO Derek McMillan argued at the LEADERS SUMMIT that older villages make a lot more investment sense than new villages.

He speaks from experience. The former CEO of Australian Unity’s Independent and Assisted Living portfolio for 18 years, he launched Centennial Living in mid-2019 to offer a new assisted living model of care – backed by around $150 million in investors’ money with an initial target of 10 retirement villages and 2,000 homes.

Now Centennial Living is actively seeking to grow its portfolio by acquiring mature villages in NSW, Victoria and South Australia.

Derek says the retirement village sector is obsessed with new villages, but this creates a challenge when it came to attracting investors.

“The challenge with attracting investment in retirement villages is that there’s three distinct phases of the lifecycle – there’s a development phase, and then there’s this immature period, a period that can last as long as 10 years, where there’s very few turnovers”.

“Then you have a mature period, a period that does generate cash flow for investors.”

“But those three phases generally do not attract the same investor. In fact, that immature phase in the middle actually extends long beyond the tenure of most investors and most investment horizons.”

As a result, the industry tends to pitch beautiful, contemporary properties, Derek went on, which don’t have any material cash flows for another 10 years, but are also supported by valuations that have an 11 or 12% discount because they are considered ‘A grade’ properties.

“Meanwhile, the 20-year-old village with a strong local reputation, high occupancy, high resident satisfaction, a sensible CapEx program and maybe an 8% yield gets whacked with a 16% discount rate because of the risk of people thinking it might become obsolete?”

Villages offer perfect vehicle for care and services

The Royal Commission Final Report – combined with the risks of different products revealed by COVID – should re-rate the relative risk for investors between aged care and villages, he concluded – particularly older villages.

“If you want a practical expression of the opportunity for villages is going forward, consider this – which is the more difficult task – trying to find an aged care bedsit room in Melbourne for less than $400,000, or finding a one-bedroom serviced apartment that’s actually priced at $400,000.”

To read the full article, including Derek’s thinking on why a village is better than a family home, and risk now favours retirement villages over investing in residential aged care, check out the full story in SATURDAY HERE.


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