Retirement village pricing compressing yields/industry sustainability issues
A recent report “Yield Compression in the Aged Care and Retirement Living Sectors” which measures the Property Risk Premium (total returns less bond yields) reveals that the aged care sector may withstand a very modest compression in yields in the order of 0.25% to 0.5% but that retirement village yields are considered to be at or below an acceptable threshold.
The report was prepared by Peter McMullen, Jones Lang LaSalle’s recently appointed National Director of Health and Aged Care Services. He believes the aged care sector has reached the point where yields will not withstand greater compression without be-coming dilutive to portfolio earnings.
During the past 18 to 24 months, the increasing level of interest in the aged care and retirement living sectors by major institutions, corporations and financiers has seen a surge in the number of transactions in both sectors.
Yields for aged care facilities have compressed by 1.0% to 1.5% over the past 18-24 months, with yields for retirement villages firming by 2% to 3% during this same period.
The report shows yield compression is being driven by low interest rates, the weight of money, the entry of new players, increased demand for product, more sophisticated analysis, the re-weighting of the industry risk profile from high to a medium risk and increased confidence in the sector encouraged by an aging population.
Despite recent re-weighting of risk in the sector, further investment opportunities must be considered with caution, Mr McMullen believes.
The Australian Bureau of Statistics estimates that between 2011 and 2031, the number of Australians aged 65 years and over is projected to grow from 3.2 million to 5.7 million. These figures have attracted investment heavy-weights such as Macquarie Bank, Babcock & Brown and Dutch giant ING, challenging established industry players such as DCA, Regis, FKP, ARC and many not-for-profit groups.
