Housing a costly equation

IT’S estimated that between $8 billion and $19 billion will be required until 2021 to build sufficient aged-care housing for Australia’s ageing population.

To date, nobody is quite sure where that money is going to come from.

Governments have implemented huge cut backs in both public housing and charity run aged-care institutions and, unlike other countries, there are no tax incentives for investors in or developers of aged-care housing.

The retirement village development industry remains small, mainly comprising church and charity groups and smaller developers, with only a handful of large developers.

With the advent of retirement village property trusts and the need for more infrastructure, both the industry and governments will need to undergo major changes to attract investment and meet demand.

Colliers International Australian director of health and aged care, Graeme Martin, said it was necessary that new models were examined to meet changing trends and increasing demand in aged-care housing.

Affordability is key. Despite baby boomers commonly being thought of as affluent and socially mobile, with more people living longer and many retiring earlier, the nest egg is smaller and needs to last longer.

Mr Martin said the future might include the development of high rise aged-care accommodation with supportive services, as opposed to today’s fringe city green-field developments.

"There would be faster vertical transportation and greater safety, it really is a matter of market acceptance," he said.

Payment structures for retirement accommodation will also have to be examined in light of the growing demand from the over-55 age bracket for independent living accommodation.

With improvements in health and medicine, this group will live for at least a further 30 years, making it difficult for developers to achieve returns under the standard loan licence model. (In this model, residents buy or pre-pay rent for accommodation and pay deferred management fees, payable upon death or relocation.)

The protracted time taken to yield profit is not attractive to developers or investors and often the model does not show returns for residents who sell out.

One of the first groups to make changes is Queensland-based company Village Life, which has developed 38 villages around Australia since 1999 and will have opened 100 by the end of 2006. 

The company’s villages are some of the first retirement properties to be packaged up into a property trust.

Earlier this year Westpac packaged $50 million worth of Village Life retirement villages into a property trust, believed to be one of the fastest selling trusts the bank has ever had.

The high level of investor interest is due not only to the market’s voracious appetite for property, but the reworking of the typical payment arrangements in retirement villages to give ongoing stable returns to investors. 

When company founders Tony Roberts and John Krimmer retired from their careers they began to think about retirement. The two friends decided that the prevalent method of buying in to retirement accommodation was too capital intensive for that time of life.

Believing that retirement was a bad time to be spending large amounts of capital, Mr Roberts and Mr Krimmer searched for other ways of setting up a retirement village formula.

What they came up with was an affordable senior rental accommodation model with property income predominantly based on the government pension and rental assistance, a model widely used in both the US and UK.

Protected by a 25-year lease, residents pay a nominal rent for fully furnished accommodation and three meals a day. 

Given that 80 per cent of people aged over 55 earn less than $320 a week, it is not surprising that Village Life has been taken up so rapidly in the marketplace.

"If we opened two villages a month for the next 25 years we will only be catering for 0.5 per cent of the available market," Mr Roberts said.

Listed property trusts may be the future of funding retirement village development.

Mr Martin said returns from the retirement property were not excessive, but they were stable.

"Tax breaks are needed to encourage investment in retirement villages similar to what there was for hospital development investment, and look what that did for that industry," he said.

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