New Study Dispels Myths About Retirement Village Profitability In NZ

Although retirement villages can be profitable, a new study by Grant Thornton New Zealand has revealed it can take more than 20 years before an operator of an average village enters a payback period for their business.

In its report titled, The path to profitability: Separating fact from fiction in New Zealand’s retirement village sector, business advisory and accounting firm Grant Thornton explores the commonly held belief about the retirement village business model disproportionately benefiting operators financially.

Pam Newlove, business advisory partner and retirement village services lead at Grant Thornton New Zealand says, “This is a major pain point for many of the operators we work with. It stems partly from a misconception that building and operating a retirement village is much the same as selling residential property where operators build units, sell them, buy them back at a discount and sell them again for more, repeating that process every few years as residents come and go.

“In reality, you only need to scratch the surface of the sector’s inner workings to see a different and more complex picture emerge – one that clearly demonstrates being a retirement village owner is not for those seeking immediate gains. These misconceptions are not helped by the financial reporting requirements for villages which can present an overly optimistic situation.”

Grant Thornton’s study is based on a discounted cashflow financial model of two retirement villages that represent a cross section of the sector: Rural villas in Canterbury and urban apartments in Auckland. It covers a 25-year period comprising the key stages of a retirement village development from sourcing land and construction, to project completion and revenue generation. It then takes into account the sector-specific sensitivities that impact a village’s profitability, some of which include occupancy lags, ORA (occupation right agreement) sale prices and construction costs.

The analysis reveals a payback period of just over 21 years for the rural complex of villas, and more than 25 years for the urban-style apartments.

Newlove says, “That isn’t to say these villages are making an operating loss for two decades. The sites in both our scenarios experience strong early cashflows from the initial purchase of ORAs by new residents and subsequent deferred management fee (DMF) payments, but this declines sharply between the seven-and-a-half to 10-year marks as ongoing operational and refurbishment costs start to eat into annual profits.

“And, the average stay of residents is also seven to eight years, which means cashflows from new DMF payments and the resale of ORAs quickly decrease due to reduced inflows of new residents. Weekly fee income is typically only just covering operating expenses, and general feedback during our research was that many operators are struggling to cover operating expenses in the current economic environment. By focussing on actual cashflows, the real financial position for operators emerges.

“Our report covers even more headwinds unique to the sector which, unlike most other businesses, sit at an unusual intersection of commercial viability and the provision of vital services for a particularly vulnerable part of our population. That’s why we should all care about the success of the retirement village sector and that starts with understanding what it really takes to invest in this industry.

“More clarity of the financial variables that impact the profitability of villages will aid the understanding of all key stakeholders and ensure a balanced approach to policy and investment decisions.”

Download Grant Thornton’s report: The path to profitability: Separating fact from fiction in New Zealand’s retirement village sector

About Grant Thornton International Ltd:

Grant Thornton is one of the world's leading organisations of independent assurance, tax and advisory firms. These firms help dynamic organisations unlock their potential for growth by providing meaningful, actionable advice through a broad range of services. Proactive teams, led by approachable partners in these firms, use insights, experience and instinct to solve complex issues for privately owned, publicly listed and public sector clients. Over 62,000 Grant Thornton people, in more than 130 countries, are focused on making a difference to clients, colleagues and the communities in which we live and work.

Grant Thornton International is a non-practicing, international umbrella entity organised as a private company limited by guarantee incorporated in England and Wales. References to "Grant Thornton" are to the brand under which the Grant Thornton member firms operate and refer to one or more member firms, as the context requires. Grant Thornton International and the member firms are not a worldwide partnership. Services are delivered independently by member firms, which are not responsible for the services or activities of one another. Grant Thornton International does not provide services to clients.

*All references to Grant Thornton International in the press release and this “Notes to editor” section are to Grant Thornton International Ltd. Grant Thornton International Ltd is a non-practicing, international umbrella entity organized as a private company limited by guarantee incorporated in England and Wales.

About Grant Thornton New Zealand Ltd:

Grant Thornton New Zealand has more than 300 people working in offices in Auckland, Wellington and Christchurch. We combine service breadth, depth of expertise and industry insight with an approachable client and people first mindset, and a broad commercial perspective.

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