How serious could new scrutiny of the retirement village sector be in terms of effects for owner/operators and investors? Photo / supplied
What’s the outlook for investments in the multibillion-dollar retirement village sector, given the Commerce Commission probe announced this week after unfair practice complaints?
Arrie Dekker, Jarden managing director and research head, released a note on this yesterday, written in collaboration with colleague Vishat Bhula.
Ryman Healthcare, Summerset, OceaniaHealthcare and Arvida Group were listed as stocks in the sector.
The note said the companies were “well positioned but not immune to impacts of scrutiny associated with some sector practices or more prescriptive control over contractual terms”.
The sector and its growth were testament to the quality of service and experience provided to residents and indicative of a sector operating without systemic issues, they said.
“But as we outline in this brief note, there is a level of concern amongst residents and resident advocates about some of the sector’s practices, with that now culminating in two reviews that have potential consequences for the sector and for investors,” the note said.
“In our view, the listed sector is well positioned to ultimately benefit from a competitive perspective from changes that level the playing field - the listed sector operating at best practice spectrum on contractual terms - and should highlight benefits of their relative financial strength also.”
There was potential for changes from the reviews that could affect business models and require adjustments.
The Retirement Village Residents Association had prompted a ComCom investigation under the Fair Trading Act and the Ministry of Housing and Urban Development (HUD) review of the Retirement Villages Act 2003, they noted.
That association’s president is Brian Peat, with Nigel Matthews its chief executive.
Over the last three years, the Retirement Commission and association had successfully lobbied for greater scrutiny of practices.
That led to a review of the act currently being undertaken by HUD as well as ComCom.
In December, the ministry issued a document settling on a wide scope for the review and has indicated a discussion document will be released for consultation prior to the 2023 election, the note said.
On potential implications, compulsory buyback and capital gains sharing could be affected.
Buyback timeframes had been a systemic issue and changing this could “test” some smaller private operators, the note said.
Forcing owners to share capital gains with residents would be a big change. Not doing this had been “a key source of cash flow for the sector over the late decade,” the note said. So owners might seek to be compensated for losing that with charging higher fees.
“In our view, any move to capital gains sharing would necessitate a higher level of the deferred management fee in compensation for what is given up in refinancing margin, much like higher DMF is being traded for lower entry pricing by some operators,” the note said.
Overall, a legal review could spell big change.
“It would be remiss to ignore the potential for change out of these reviews, with the sector needing to take a balanced approach in its response,” the note warned.
The Retirement Villages Association (RVA) which represents owner/operators was looking to strike a balance, with its representation of operators ranging from one or two small villages through to the large corporates.
“Certainly we think the RVA is right to strongly push back on any suggestion key commercial terms in contracts might be retrospectively applied. As we consider how this might play out, we note that the listed sector has positioned itself externally as being very profitable, reporting large statutory profits and large underlying profit also,” the note said.
“This is in stark contrast to the low levels of cash profitability we observe amongst the listed sector. We see this lack of cash profitability for the largest operators as a symptom of challenges in the care business - increasingly an amenity that is being converted to the RV model but with some large facilities in older villages - and high overheads associated with delivering the quality of care and experience,” the note said.
The note said HUD was considering if the act and associated codes and regulations remained fit for purpose to ensure appropriately defined rights and responsibilities, the right balance between rights and responsibilities of residents and operators, adequate consumer protections and ongoing viability of the sector and its ability to provide a range of options.
The review is looking at three phases:
* Moving in: occupational right agreements and disclosure statements;
* Living in: dispute resolution, complaints, maintenance, building quality;
* Moving on: weekly fees after exit, resale of units and return of capital sums to residents.
This week, RVA executive director John Collyns expressed surprise at complaints.
“We’re puzzled by the complaints from Consumer NZ and the Retirement Villages Residents Association. We have been discussing their concerns with them and taking steps to inform members where any changes are appropriate so we don’t see a need for any investigation,” he said.
His members were fully committed to meeting the requirements of the Fair Trading Act and would fully cooperate with the Commerce Commission.
He referred to complaints about RVs making misleading claims they could provide a continuum of care. This is in reference to them being unable to move people from villas to apartments and hospitals when they become older and unwell.
Jon Duffy, Consumer NZ chief executive, said that was one of the misleading claims RV operators made.
But Collyns said this week: “No member can ever give a guarantee of a bed, but in practical terms there is very rarely an issue, which is typically addressed promptly. The move to care obviously depends on a bed being available when required.
“Operators target making beds available to residents in their own village, either seamlessly or within a very short window. For most residents, the transition to care is straightforward and planned, but it is obviously dependent on space becoming available,” Collyns said.
An RVA survey of more than 1000 residents showed of those who wished to move to care at their village, only 13 had to leave to go to another facility due to a lack of vacancies and only eight needed to be temporarily shifted elsewhere until a vacancy occurred, Collyns said.