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Existing retirement facilities in popular areas may be worth a second look from investors, due to shrinking profit margins for developers in this sector, according to an audit, tax and advisory firm.
Dwindling returns for retirement sector developments has caused new building to slow, at a time where retiree numbers are growing, according to BDO’s national leader for senior living, Jonathan Karlovsky.
Mr Kalovsky explained that approvals issued by the Federal Government for these projects are often handed back, rather than acted on, as a result of growing unprofitability, leaving rents high on existing property.
“When applying for a licence to build an aged care facility, you must first obtain an Approval In Principal (AIP) from the Federal Government.
“Five years ago, AIPs were highly valued as developers and operators, including many banks, competed to enter the highly profitable sector. In fact, the market for APIs was so competitive, on-selling APIs was common place,” he said.
“The market has shifted significantly. AIP approvals are being handed back to government – something unheard of just five years ago.
“Developers have found new facilities are too expensive to build when compared to return on investment as the return margins are very small.”
This is particularly the case for ‘affordable’ development locations, typically long distances from city centres, where many retirees are now no longer looking to live.
“When choosing a retirement home, retirees are very fussy about where they reside as choosing a retirement facility is a huge financial decision. In fact, many are forced to sell their homes in order to meet the bond prices,” he said.
“Many of these facilities are perceived to be in worse locations than their homes, which means many retirees are choosing to remain at home for longer.
“The flow-on effect is a vast number of retirement villages in unpopular areas and the price of living in these facilities is sometimes unaffordable.”