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Macquarie still upbeat on retirement village sector, consents up in November

Thursday 19th January 2017

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Building consents for retirement villages continued to rise in November as operators expand to meet the demands of New Zealand's ageing population and Macquarie Group is still upbeat on the sector despite a lower forecast for house price inflation.

A total of 205 consents for retirement village units were issued in November versus 174 in October, data from Statistics New Zealand showed. Retirement village consents fell 8.1 percent on the year, but are 87 percent higher from the same period in 2011. 

Government figures show the number of people aged 65 and older doubled between 1984 and 2014 to reach 650,000 and that number is projected to double again by 2039. Against this backdrop, listed retirement village operators like Ryman Healthcare, Metlifecare and Summerset Group have been rapidly expanding and reporting record profits as they benefit from New Zealand's hot housing market.

Summerset's underlying net profit rose 44 percent in the six months to June and it expects to report earnings rose by as much as 46 percent in 2016. Ryman said its underlying profit rose 9 percent in the six months to Sept. 30 and it expects full-year underlying profit of between $175 million to $185 million, up from $157.7 million last year. Metlifecare, meanwhile, reported a 26 percent jump in underlying earnings, also driven by an increase in sales of so-called occupation rights agreements. 

The village owners do not buy and sell the units but sell the right to occupy. When a resident vacates the unit they receive their original investment back less a management fee. The owner can then resell the unit for the current market value, effectively receiving all of the capital gain and the management fee. According to Macquarie, in New Zealand this typically sits between 20 percent and 30 percent. House prices were up 12.5 percent in the year to December data and are 52 percent above the previous market peak of late 2007, according to government valuer Quotable Value. 

Macquarie this week sounded a note of caution as it took a less bullish view of house prices. It lowered its long-term assumptions for house price growth by 1-to-3 percent, something it said will have an impact on resale gains and management fees, as the fees are a percentage of the unit price.

"The level of house price appreciation is a key determinant of the level of retirement village profitability," Macquarie said in a note. Other indicators today also point to an easing in the property market, with the latest ANZ-Roy Morgan consumer confidence index showing house prices are expected to rise 4.3 percent per year versus an expected 5.4 percent in the prior survey in December. 

While Macquarie was less upbeat on house prices, it continued to rate all three companies at 'outperform' and said it is "still positive" on the sector. Its target price for Metlifecare remains unchanged at $7.25 as the impact of lower house price inflation is offset by a reduction in the risk free rate and an increase in historical unit price inflation. Metlifecare is currently trading unchanged at $5.50.

Macquarie lowered its Ryman target price to $10 from $11 and the stock is trading at $8.40. It increased the target price on Summerset to $6 from $5.60, again as the increase in forecast resales volumes and increase in historic unit price inflation outweighed the reduction in its house price inflation assumption. Summerset is currently trading at $4.71, down 0.2 percent.

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