Savvy investors are realising that retirement villages offer a big discount value opportunity

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The recognised measure of the value of a retirement village is the discount rate a valuer calculates, based on demand by willing buyers, and the future income flows the village business will generate over the next 10 years.

The higher the discount rate, the higher the value of the village is discounted (reduced).

Currently good villages have a discount rate of around 12.5%, down from five years ago when it was 13.5% to 15%.

This compares to shopping centres that can have a discount rate between 8% and 9%, but they are a similar business with future rental income the value measurement.

In last Saturday’s edition of SATURDAY, veteran retirement village financier Jim Hazel said: “I think with the clarity around how the industry looks going forward, we are starting to see capital mobilise and see the industry as cheap, which it is.”

In the same SATURDAY edition Damien Webb, Head of Income and Real Assets at Aware Super, acknowledged that retirement villages are still a “somewhat unloved” asset class among investors.

“It’s a contrarian bet,” he stated.

“It’s rare you can look at a sector that is somewhat unloved from an institutional point of view. You see these discount rates that are quite elevated and haven’t moved much as other cap rates.”

“If you look at cap rates of industrial assets, even retail, they are all still trading quite tightly, whereas the equivalent discount rates on residential haven’t moved much at all.”

“What we are seeing is more interest in multifamily [build-to-rent] from other investors,” said Alek Misev, Aware Super’s Portfolio Manager of Property.

“That is likely the first step for them to get into residential and maybe retirement and other sectors will follow.”

Aged care support the key

Jim Hazel says the product offering is still key: “People do not want to go into aged care, as it exists today. It is just a matter of retirement village operators figuring out the best way to do it.”

“We will see four or five different ways of going about it, and we will hone in on what works,” concluded Jim.

“It’s going to be a good place to be for the next 10 years – now it’s up to boards and management teams to develop their strategies.”