In a low-rate world, investors are seeking assets with cashflow and the opportunity to add value. This is one of the key drivers behind Qualitas’ entry into the Retirement Living sector. Here, we outline the investment thesis underpinning the Qualitas Seniors Housing Fund No. 1.

Mark Fischer, Managing Director, Global Head of Real Estate, says that Qualitas focuses on identifying investments with long-dated cashflows, particularly in a sector where assets are mispriced.

Retirement living – also known among institutions as Seniors Housing – is an asset class that meets this thesis.

“Over the last 20 years, the real estate universe has grown considerably in both its scope and complexity. Investors now have a broader menu of investment opportunities with a wider definition of real estate. Seniors Housing is one such opportunity, and it has a number of attractions for investors seeking long-term cashflow and capital growth upside.”

While the demographics of the asset class are supportive, Mr Fischer says the ownership structure is also key.

“Not only do we look for good real estate fundamentals, but also mispricing by capital markets. The retirement demographic story has existed for a long time, but that alone isn’t a reason to invest. The key opportunity is for a better funding model in a highly fragmented sector.”

Many assets are currently owned by small, private operators, or by large listed property groups, he explains.

“Both small and large owners are struggling to manage the complexity of the assets and variability of cash flows inherent to this sector. Small players struggle to secure funding needed to upgrade and maintain facilities, or lack operational expertise to drive asset performance. Large, diversified owners are challenged by the lumpy income that’s quite different to their office or industrial assets.

“By coming in with the right capital structures and equity sources, we see a compelling opportunity for large-scale private capital to generate outsized returns.”

An evolving sector

With a large swathe of ‘baby boomers’ now retiring, the sector is on the cusp of a new era, according to Henry Vuu, Senior Director – Real Estate, Head of Execution and Analysis.

“There is relatively low penetration at the moment; fewer than six percent of over-65’s live in retirement communities. As the population ages, however, physical, safety and emotional factors are prompting retirees to consider the retirement village lifestyle.

“They are seeking a sense of community, dedicated services and a built environment that supports their transition through the different stages of their retirement. In addition, some view it as a way to downsize and unlock the considerable wealth tied up in their homes whilst still being within close proximity to familiar surroundings and their network of family and friends.”

Qualitas believes asset owners who innovate in this area will increase their appeal to prospective residents.

“Traditionally, retirement villages cater to only one market segment and don’t focus on the transition between retirement living to assisted living. With an aging population, operators need to increase the service proposition of existing villages to bridge the transition from independent to assisted retirement living and to provide a continuum of care,” Mr Vuu said.

Qualitas’ retirement living portfolio focuses on retirement villages that can be repositioned or converted to increase the service proposition, and cater to the two key stages in the continuum of care lifecycle: independent retirement living and assisted living. At the same time, this approach avoids the highly regulated and capital-intensive aged care sector.

A counter-cyclical investment

From an investment perspective, Qualitas is positioning the Qualitas Seniors Housing Fund No. 1 as a long-term cashflow investment, and a counter-cyclical investment opportunity, with the quality of the operator a key to its success.

Mr Vuu said, “The retirement village industry in Australia remains highly fragmented with a number of smaller, private owner/operators reaching retirement age themselves. They may lack succession plans or the resources to evolve to the continuum of care model. We consider that these will present opportunities for investors with long term investment mandates.”

“We consider the risks associated with owning a retirement village are similar to those of owning hotel, student accommodation and self-storage real estate assets. Qualitas has experience in these assets such as these, and we are partnering with a highly experienced operator in the Seniors Housing sector to manage these assets on our behalf.”

Focus on the resident experience

Qualitas has appointed Centennial Living to manage its initial Seniors Housing portfolio. The company was founded and is led by highly-regarded retirement living executive Derek McMillan, who was previously the CEO of Australian Unity’s retirement and aged care business. This appointment is an important differentiator for Qualitas’ investment model.

“An experienced and skilled operator is required to deliver value from retirement villages. There is a particular skill-set in understanding and delivering on residents’ needs, as well as managing turnover and contract structures. With a limited number of operator-only providers in the market, the required expertise creates a barrier to entry for more traditional real estate players.

“Investing in retirement villages is as much about understanding the needs of residents as it is about understanding real estate and to this end, we consider that the skillsets of Qualitas and Centennial Living are complementary in creating desirable retirement villages for residents, at the same time as generating value for investors,” Mr Vuu said.

He adds that a key aspect of operational success is the management of contracts, with purchasers increasingly expecting flexibility.

“Operators can increase occupancy and reduce marketing costs by having contract options that respond to the diverse financial situations of residents; for example, downsizers have different needs to self-funded retirees and it’s important to cater for each of them.”

The initial Qualitas Seniors Housing Fund is comprised of three assets located in Melbourne’s north-west. Burnside Retirement Village, Taylors Hill Retirement Village and Keilor Retirement Village have 649 dwellings, housing over 900 residents, with plans underway to selectively expand the portfolio of assets. To read the announcement, click here.