It’s hard to read a newspaper these days without seeing another front-page story on the looming “mortgage cliff” for home borrowers, as interest rates climb.
I feel sorry for young families who bought at the top of the market a few years back – and followed the Reserve Bank’s advice that rates will stay low for years.
KPMG this week argued that hundreds of thousands of homeowners face an extra $16,500 in loan repayments over 12 months. As their mortgage resets from a super-low fixed rate to a much higher variable rate, interest payments will balloon.
It will be worse for some. KPMG based its analysis on the average mortgage of $600,000. Plenty I know have much larger mortgages than that, thanks to sky-high property prices in Sydney, Melbourne and Brisbane over the past few years.
Combined with rising living costs, higher interest rates will crush families that have little spare cash to pay the bills. If rates rise a few more times this year – as financial markets expect – many families will be forced to sell, and crushed financially for years.
As the media focuses on younger homeowners, spare a thought for older Australians. They are typically less affected by rising home-loan rates and benefit from rising rates for bank deposits. But those on fixed incomes are hurt by soaring living costs.
Many who saved for retirement have watched their nest egg gyrate with global equity-market volatility. They’ve had to cut back as the value of their investments fell.
Then there’s the ageing population – the greatest megatrend of them all. As people live longer, they need their retirement savings to last as long as they do. Some will have to work longer; others will need part-time jobs to supplement their savings.
I suspect these and other trends will encourage more retirees to downsize in the next few years. Those who have a big chunk of equity in the family home will sell, move to smaller affordable accommodation – and pocket some gains.
Perhaps they’ll use some of their gains to help their kids buy a house or keep their existing one as they struggle with soaring interest costs. Maybe some retirees will use their home equity to help pay school fees for their grandchildren.
My point is: all these financial pressures will encourage more retirees to draw down on their capital. For many, that capital is tied up in the family home.
Which brings me to listed property companies that specialise in affordable housing for seniors. I expect they will get more enquires in the next few years – and benefit from higher settlement rates – as more retirees need their capital to cover living costs.
Here are two key property-development companies that provide affordable accommodation for older people. Both stocks have come off over the past two years, in line with broader weakness in the Australian Retail Estate Investment Trust sector:
1. Lifestyle Communities (LIC)
I have written positively about the Victorian property developer several times for this report over the years. Lifestyle Communities is one of the market’s best-performed small caps: the five-year total return (assuming dividend reinvestment) is 31%.
To recap, Lifestyle Communities develops residential communities for older people seeking to downsize. It focuses on the Melbourne-to-Geelong corridor.
The company’s business model has two main parts. First, a mix of equity and debt capital is used to develop greenfield sites and create communities. Capital recovered from those communities is recycled into the next project and so on.
The second part is a recurring revenue stream from managing communities. Home owners in Lifestyle Communities own their property and lease the land. The weekly rental fee is up to a quarter of the Aged Pension (after rental assistance).
It’s a clever business model. Homes in the community are typically priced at 75-80% of the median price in the target catchment. The company says people who downsize typically release about $240,000 in equity from the sale of their previous home.
That $240,00 would come in handy for retirees who own their home, but are under growing financial pressure. It’s also a lot simpler than reverse mortgages, particularly for those who want a smaller new home and community living.
I like Lifestyle Communities’ cookie-cutter model. Build one residential community, settle the property sales, then build the next. Then, receive a recurring low-risk revenue stream each year that slowly builds as more homes are sold.
I also like that Lifestyle Communities sticks around Melbourne – a market that relatively has more accessible flat land at the fringes. Other companies would have tried (and probably failed) to expand nationally by now or move into other property segments.
Lifestyle Communities’ shares are down about 7% year-to-date, in a rising market. The stock is down from a 52-week high of $20.32 to $16.40.
At its latest interim profit release in February 2023, Lifestyle Communities reported net profit of $25.2 million for the first half of FY23, down from $27.5 million a year earlier.
Importantly, previous guidance to deliver 1,400-1,700 new home settlements between FY23 and FY25 was maintained. The company said it was happy with sales results at its new projects and that “demand for high-quality, affordable housing remains strong”.
I couldn’t see too much wrong with the result. Slightly lower new home settlements (141 in the half compared to 161 a year ago) were the main reason for the fall. Higher marketing costs to sell new homes were another factor. That’s not surprising given the disruptions from COVID-19 and supply-chain challenges last year.
The fall in Lifestyle Communities’ profit and lower share price this year looks more like an aberration – and an opportunity for long-term investors who understand the growth potential of affordable housing for seniors as more people downsize.
Chart 1: Lifestyle Communities
Source: Google Finance
2. Ingenia Communities Group (INA)
Like Lifestyle Communities, Ingenia develops affordable-housing communities for older people. Ingenia’s communities (in FY22) house almost 11,000 residents.
Ingenia also has tourism parks and garden communities (for senior rentals). Most of the company’s developments are in Queensland and NSW.
Ingenia has a different business model and risk profile to Lifestyle Communities. About a third of its earnings (in FY22) come from holiday parks, giving the stock exposure to the tourism market – a difficult place to be in this year.
There’s a theory that Ingenia’s budget family holiday offerings will do better if people cut back on expensive overseas trips. I fear the magnitude of rate rises will make holiday accommodation, even the budget kind, beyond the reach of more families this year.
In November 2022, Ingenia said its profit would be at the lower end of its guidance range (EBIT growth of 30-35%). Wet weather affected its Victorian developments and delays in finding tradespeople and contractors was another problem. As a result, Ingenia lowered its forecast settlements for FY23 from 525-550 to 460-485.
After rallying in 2020 and 2021, Ingenia has fallen from a 52-week high of $5.65 to $4.53. The stock’s one-year total return is minus 15%.
There’s a lot to like about Ingenia’s long-term prospects and market position. Affordable housing, budget accommodation and senior rentals are growth markets. Ingenia has done a good job in building a foothold in these three segments.
However, my preference remains Lifestyle Communities. I prefer the simplicity of its building model, geographic exposure and lower-risk exposure. The stock provides purer exposure to affordable accommodation for seniors – a market I like.
I also need to see how Ingenia fares with its interim result for FY23, due on February 21. I’m looking for signs that the building delays that affected Ingenia’s housing settlement rates are easing.
Chart 2. Ingenia Communities Group
Source: Google Finance
Tony Featherstone is a former managing editor of BRW, Shares and Personal Investor magazines. The information in this article should not be considered personal advice. It has been prepared without considering your objectives, financial situation or needs. Before acting on information in this article consider its appropriateness and accuracy, regarding your objectives, financial situation and needs. Do further research of your own and/or seek personal financial advice from a licensed adviser before making any financial or investment decisions based on this article. All prices and analysis at 15 February 2023.
