A recent study by Grant Thornton New Zealand has found that while retirement villages have the potential to be profitable, it may take operators of an average village over 20 years to reach the payback period for their investment.
The report, “The path to profitability: Separating fact from fiction in New Zealand’s retirement village sector,” examines the widespread perception that the retirement village business model overwhelmingly favours operators financially.
Grant Thornton’s study utilises a discounted cash flow financial model applied to two retirement villages that exemplify different segments of the sector: rural villas in Canterbury and urban apartments in Auckland.
The study spans a 25-year timeframe, encompassing the essential phases of a retirement village development—from land acquisition and construction to project completion and revenue generation.
It also considers sector-specific factors that affect a village’s profitability, such as occupancy delays, ORA (occupation right agreement) sale prices, and construction expenses.
The analysis shows a payback period of slightly over 21 years for the rural villa complex and exceeding 25 years for the urban-style apartments.
“That isn’t to say these villages are making an operating loss for two decades,” said Pam Newlove, business advisory partner and retirement village services lead at Grant Thornton New Zealand.
“The sites in both our scenarios experience strong early cash flows 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 cash flows 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 focusing on actual cash flows, the real financial position for operators emerges.”
Newlove further stated that the report tackles additional challenges specific to the sector, which, in contrast to most other industries, operates at a crucial juncture between ensuring commercial viability and providing essential services to a particularly vulnerable demographic.
“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.”