The Valuers' View - Aged Care Property
The Valuers’ View
To assist lenders, investors and owners, the Valuers at m3property have contributed their opinions on the current performance of the property markets and where they expect those markets to head over the short to medium-term.
The survey examines nine property sectors, looking at the key measures of market yields, internal rates of return (IRRs), rents incentives and value. Occupancy rates and average daily room rates were added to the survey for the hotel sector. Indicators including zeros indicate stability was also selected by respondents.
The key themes that will drive the real estate markets in 2021 will be:
Economic recovery as restrictions ease and confidence returns
Low population growth, but likely to rise as the vaccine rollout continues and borders re-open
Record low interest rates
Continued focus on Environmental, Social and Governance (ESG) factors when investing and managing portfolios
Growth in inflation resulting in rent growth for landlords, where rent increases are linked to inflation
The gap between prime and secondary yields is likely to widen
Government spending to remain high, despite stimulus starting to reduce
‘Flight to quality’, flexible terms and convenience expected to continue to drive tenant demand
Rebound in investor demand due to cashed-up investors, low cost of debt and global interest in strengthening countries with stable property returns
Continued investor focus on defensive assets, particularly in sectors with government backing and for properties with long WALEs and minimal need for capital expenditure
Despite strengthening residential markets, the official cash rate is likely to remain on hold in the short to medium term due to continuing economic uncertainty, low wages growth and labour markets not being at full capacity. The appearance of an asset price bubble is more likely to be remedied with macro-prudential constraints on lending rather than rising interest rates, which could derail the economic recovery if used too early.
If the post-COVID-19 economic recovery does surprise on the upside resulting in asset price bubbles, full employment and rising wages, this would drive up inflation, bond yields and the cash rate. This scenario would represent a risk to the property markets as it could flow through to the cost of capital and yields. That said, the RBA is likely to continue to implement yield curve control to keep bond yields in line with the economic recovery and a strengthening economy would provide stronger cash flows and vacancy would reduce.
Aged Care Property
The aged care sector faced challenges before COVID-19, with a Royal Commission into Aged Care Quality and Safety established in October 2018 and 148 recommendations made in the final report released in March 2021.
The m3property report on the Royal Commission and Aged Care in Australia found public spending on long-term care (which includes care provided in institutions, within the home or through community services) is comparatively low in Australia relative to other countries. On a per-capita basis, total spending in Australia on long-term care is considerably lower than other OECD countries and accounts for a smaller proportion of GDP.
Aged Care Results
Yields and IRRs
- With ongoing uncertainty within the sector, prime and secondary yields and IRRs are likely to soften by a similar margin in 2021 as occurred in 2020.
- Confidence is expected to return to the sector as additional government funding is implemented based on the Royal Commission’s findings and as the population continues to age.
Rents and Incentives
- Face rents were generally stable, with incentives increasing marginally for prime and moderately for secondary facilities during COVID-19. Effective rents, therefore, reduced over the past twelve months to March 2021. This reduction in effective rents is forecast to continue in 2021.
- Prime aged care assets witnessed a slight decrease in value during the pandemic. Prime aged care property values are likely to stabilise over 2021. Secondary assets, particularly those requiring capital expenditure, are expected to witness further slight falls in value over 2021.