Property News

Baby boomers a boon for aged-care players

2 January 2007

Expectations of a flood of baby boomers hunting for retirement living in coming years has spurred another heated year of transactions in the aged-care sector.

Increased demand for aged-care facilities among investment heavyweights such as Macquarie Bank, Babcock & Brown, FKP and GE has seen asset yields firm considerably in 2005, with further tightening expected this year as property players position themselves to capitalise on Australia's ageing population.

In the past two months alone, more than $600 million of aged-care assets have changed hands with the Melbourne-based Australian Retirement Communities portfolio - tipped to fetch more than $600 million - set to be sold within weeks.

Listed property giant Stockland, which in recent years has announced plans to expand into the sector with limited success, is tipped to be the frontrunner on the portfolio of 17 retirement villages and 6 aged-care facilities owned by the Knowles family.

Only this week, FKP Property Group said it would pay up to $220 million for three Sydney retirement villages owned by building industry super fund Cbus.

Australian players have also been very active offshore in the aged-care sector, with the listed GPT earlier this month taking a $544 million stake in the US Benchmark Assisted Living aged-care portfolio.

ING Real Estate Community Living Fund chief executive Ian Muir said that increased demand for aged-care assets had forced capitalisation rates on rental retirement villages to 7.5 per cent - down from 8.5 per cent 12 months ago.

He said those capitalisation rates were expected to tighten further into 2007. Mr Muir said discount rates used to calculate the values of deferred management fee retirement villages had also tightened in the past 12 months.

"We see discount rates for established villages now in the order of 12.5 per cent to 13 per cent, when yields on deferred management villages 12 months ago were in the range of 13 to 14 per cent," Mr Muir said.

Retirement villages using a deferred management fee structure only book revenues when aged-care units are turned over, which is typically when the occupant dies. As such, the value of those villages is generally calculated using discounted cash flows of expected future management fee payments.

The spectre of millions of retired baby boomers swapping their suburban castles for coastal aged-care facilities continues to excite investors, with many pundits predicting an "inevitable" boom in the sector in coming years.

However, those punters looking to turn a huge profit in the sector in the short-to-medium term could be disappointed.

Demographer Bernard Salt said the "motherlode" of baby-boomer retirees won't be knocking on the doors of retirement villages until the 2020s.

"The baby boomer starts turning 65 in 2012, 70 in 2017 and 75 in 2021," Mr Salt said. "My argument is you really need a part of the generation over the line before you really start to make an impact on a sector and I think, increasingly, aged care is something that applies later in life.

"So, I think baby boomers will not be making a real demand on aged care until well into their 70s which puts (a surge in demand) at the 2020s."

However, Mr Salt conceded demand for aged care would steadily increase over the next decade - and the market is likely to be ramped up by the expectation of a future surge in aged-care demand. "It will be a slow build to a significant shift in the 2020s, so it's not going to come out of left field but equally the peak in that sector is still some time off," he said.

Managing director of listed retirement living company Aevum, Simon Owen, said demand for aged-care assets was expected to continue to increase in 2007, led by demand from the big players.

"We're seeing a lot of activity from institutions such as Macquarie Bank and Babcock & Brown and also the players like FKP and AMP, but our strategy at the moment is about identifying smaller off-market transactions," Mr Owen said.

Aged care is also set to become a political battleground next year with new federal Labor Opposition Leader Kevin Rudd this month citing the provision of housing for the elderly as one of those services caught up in the funding "blame game" between the commonwealth and the states.

Tied up in that debate are Mr Rudd's estimate of 1684 people who should be housed in aged-care facilities but are instead occupying hospital beds at a taxpayer cost of more than $500 million a year.

The Minister for Ageing, Santo Santoro, this month said he would unveil the federal Government's long-awaited reforms for aged-care funding early next year.

But industry figures remained sceptical about the Government implementing any major reforms - expected to be based on recommendations of the 2004 Hogan report into aged care - ahead of next year's federal election.

"The Government's been sitting on the Hogan report for several years now," Mr Owen said.

"One of the key recommendations out of the (2004) Hogan report is for more of a move towards a user-pays model in aged care - but I doubt we will see any changes to the funding model leading into next year's federal election."