Grant Thornton New Zealand's study indicates retirement villages can be profitable, but it can take more than 20 years to fully recover investment. Photo: RNZ / REECE BAKER
A report on retirement villages indicates most are operating on razor thin margins, with little prospect of making a quick return on investment.
Grant Thornton New Zealand's study indicates retirement villages can be profitable, but it can take more than 20 years for an owner of an average village to fully recover their investment.
"This is a major pain point for many of the operators we work with," Grant Thornton retirement village services lead Pam Newlove said.
"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.
"These misconceptions are not helped by the financial reporting requirements for villages which can present an overly optimistic situation."
The study covers a 25-year period from sourcing land and construction of a retirement village, to project completion and revenue generation.
The research indicates the payback period for a rural villa complex would take 21 years, with investment in an urban-style apartment complex to take more than 25 years.
"That isn't to say these villages are making an operating loss for two decades," she said.
The study indicates both types of sites experienced strong early cashflows, though ongoing operational and refurbishment costs started to eat into cashflows for occupancies lasting between 7.5 and 10 years.
Weekly fee income typically covered operating expenses, but not in all cases, with some operators reporting losses of about 20 percent.
"General feedback during our research was that many operators are struggling to cover operating expenses in the current economic environment," she said, adding it was important to understand the stresses facing the sector, given the service they deliver to an ageing population.
"(Retirement villages sit) at an unusual intersection of commercial viability and the provision of vital services for a particularly vulnerable part of our population."
She said the imposition of mandatory payouts on the sale of units, when occupants leave or die, could be difficult to meet for village operators with limited cashflow and high operating costs.
"I mean, we see there's a perfect storm brewing."
Newlove said the report aimed to set out the industry's financial limitations.
"By focusing on actual cashflows, the real financial position for operators emerges."
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