The retirement living sector is booming thanks to Australia’s rapidly ageing population. So how can savvy property investors get a slice of the action?
By RICHARD ANDREWS
Unless you’ve been living under a rock for the past 10 years you would know that Australia’s population is rapidly ageing. The maturing of the country’s demographic profile is changing the nature of our living arrangements and driving a boom in the retirement living sector.
At the time of the last nationwide Census in 2006, there were almost 2.7 million Australians aged over 65, making up around 13 per cent of the population.
Australia’s aged population is concentrated in the eastern seaboard states, with South Australia and Western Australia also holding reasonably sized aged populations. Tasmania and the territories have much smaller aged populations.
Looking forward to 2016, the Australian Bureau of Statistics estimates that this age demographic will grow dramatically in every state, with a nationwide average increase of 54 per cent.
The ageing population will present many challenges for governing authorities, but also opportunities for entrepreneurs and investors around health, aged care and housing.
Players in this market
It’s estimated that around half of the retirement communities in Australia are owned by corporations such as investment banks and large property companies, with the remainder owned by the private or not-for-profit sector, including church groups and benevolent associations.
Rental villages, however, offer a way for investors to acquire direct exposure to the retirement sector, where units in complexes are purchased by investors specifically for the purpose of renting to elderly tenants.
Rental retirement villages operate under standard residential tenancy agreements and a specialist, retirement village management company is appointed by the body corporate or owners corporation to operate the village on behalf of investors. The actual onsite manager is an employee of the management company and responsible for the day-to-day operation, leasing and maintenance of the complex.
The management company charges letting and management fees, however investors are free to appoint external real estate agencies for these tasks if they choose. Management companies will typically offer additional services to village residents such as cleaning and meals, and these are contracted directly with the tenant.
It’s fair to say that the rental model for retirement villages is still evolving in Australia.
Rental retirement complexes are typically found in fringe and suburban locations and are popular with retirees who possess a limited capital and income base. The rental units are usually one-bedroom apartments, often not much bigger than 40 square metres in size.
Many of these villages were sold to “mum and dad” investors around 10 years ago by financial planners and property spruikers at inflated prices.
As a rule, they don’t perform well as investments due to the inability of rents to match the market and there is concern around the viability of the business model for operators of the complex.
That said, one of the benefits of buying an investment property in a rental village is the low cost of acquisition. It’s still possible to buy units for under $100,000, although an average price would be around $140,000 to $160,000.
Investors should be aware that banks are hesitant to lend against these types of assets.
Investment returns consist of a rental income yield and capital gain upon sale. A gross yield of between two and nine per cent is diluted by the usual property-related expenses such as rates, letting and management fees, and property maintenance.
Capital gains are constrained by the lack of opportunity for an investor to increase rent, as a tenant’s ability to pay is directly related to the value of the age pension and rent assistance allowance. Consequently, the total value of individual units in the better-located villages is likely to be less than the actual value of the land the village occupies.
Unlike normal residential investment property, the performance of a rental village unit will be largely dependent upon the ability of the village manager to drive occupancy and rental growth.
With such a low purchase price, the reluctance of banks to lend against the asset as well as constrained yield and capital growth prospects, the logical owners for these properties are low-end owner-occupiers. A suggested opportunity for investors would therefore be to buy, renovate and flip to an owner-occupier.
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Richard Andrews is the founder and director of Find My Retirement Home, a company that acts as an independent adviser and buyers agent to retirees looking to purchase a retirement home. Visit www.findmyretirementhome.com.au